Originally published by AxiTrader
Welcome to the Forex Today column.
In it, I'll be trying to add a bit more colour and a lot more charts than I do in my broader overnight Market Wrap I do first thing every morning to set myself and my trading up for each day and each week.
KEY THOUGHTS ON FOREX MARKETS
The US dollar is turning. It is supported by stronger data and some concerns surrounding the outlook for the euro now that Spain has a potential constitutional crisis surrounding the Catalonian referendum. Sterling is under pressure too from an economy that is slipping.
But what's building in foreign exchange markets is a story of US dollar strength, not other currency weakness. If the data continues to track higher - Citibank economic surprise index is back in the black for the first time since April - then traders will have to take note and recognise the fed is as serious as it sounds about raising rates.
That will bias the euro back toward 1.1525, yen to 114.00/50 (eventually), USD/CAD toward 1.2750/1.28 and the AUD/USD to 0.7650 - among other moves.
Data, US rates, and the Fed are all moving in the US dollar's favour.
HERE'S A DEEPER DIVE - IN A LITTLE MORE DETAIL AND WITH A FEW CHARTS
For those who didn't see what I wrote in my overnight wrap here it is again with the addition of a bond chart and one for the GBP/USD after it hit my target last night.
THE BIG DEAL, the very big deal, for traders – especially forex ones – is that the Citibank Economic surprise index has climbed back into positive territory after last night’s data. That means that for the first time since the end of April this year it the data flow is again beating consensus.
As you can see in the chart above, that collapse in the data – the CESIUSD fell to a low of -78.6 in mid-June – was a big part of the US dollar’s weakness. The recovery in the data hasn’t been as strongly positive for the buck – yet.
What’s important here is that regardless of what Neel Kashkari says the US economy is expanding and the Fed is likely to raise again this year and then 2-3 more times in 2018. All the while running down its balance sheet. That puts upward pressure on rates, bond spreads, and the US dollar – even before the stimulatory impact of the Trump tax cuts when they pass the Congress.
And while the Fed normalises its balance sheet and the Fed Funds rate the data might just normalise the bond rate which will further support the US dollar.
Here's a chart I saw in a tweet by Alphbub this morning.
And looking at the US dollar - a break of 93.70 would take out last week’s high and see the US Dollar Index off and running.
DXY Futures Daily (Source: Investing.com)
Looking specifically this morning the euro is down 0.67% at 1.1734. Last night’s low was 1.1724 which is just above the previous week’s double low on consecutive days around 1.1715/20. That makes this zone a critical region which if broken will open up the downside to 1.1660/80. A break of this latter level would potentially be a sentiment changer. My current target remains 1.1525 however – just a garden variety 38.2% retracement level of the the big swing to recent highs.
USD/JPY is higher, up 0.24% at 112.74, actually looks a little toppy. Yesterday’s Tankan survey – like the other data I discussed above – was actually pretty solid and levels above 113 are looking a little tough for the bulls to crack at the moment. Only a break of 112.15/20 however would suggest a big fall.
Sterling was the worst performer among the G10 with a fall of 0.93% to 1.3273 after the worse than expected PMI print overnight. It's hit my target now but looks biased toward 1.3194 which is the next level of support. My short has been reduced.
Of the commodity bloc the Canadian dollar lost 0.34% with USD/CAD up at 1.2508 as oil prices slid overnight. The kiwi is at 0.7194, down 0.15% while the Australian dollar is down 0.09% at 0.7826.
Have a great day's trading.