Originally published by AxiTrader
QUICK SUMMARY
President Trump doubled down on trade and tariffs and took aim at the yuan and euro again as CNBC released the full interview and the President tweeted away as is his want.
That gave the reversal in the US dollar a little more oomph.
Equally though, recent positioning and data flow from the US and other regions of the globe the US dollar has been and remains the most vulnerable asset to the Trump rhetoric right now. Naturally then after a concerted period of holding lows the euro was higher and is back at 1.1733 this morning. The US Dollar Index is at 94.47 after another failed foray higher last week and the yen is much stronger with USD/JPY at 111.29 after peaking at 113.16 last week.
Sterling is defying growing hard-Brexit talk over the past week. There was more chat from both sides of the Channel over the weekend which seems to suggest the EU is not being as malleable as British PM Theresa May would like. GBP/USD is at 1.3126.
The commodity bloc rallied as well with the Canadian dollar benefitting from some strong data. USD/CAD is at 1.3135 – testing support. The kiwi was down in early trade this morning at 0.6787 but it's back at 0.6810 now while the AUD/USD is at 0.7416 and looking strong given recent data and ready for a lift if the US dollar keeps falling.
BIGGER PICTURE
Has the US dollar turned? That’s the question I got most often from folks over the weekend.
Whether it was Twitter DM’s or emails direct there was a large number of traders who wanted to know what’s next after the comments from President Trump and I think the big head fake we saw from the PBOC on the yuan fix Friday.
Indeed my sense is the PBOC might have been caught a little by the reaction to the big weakening from the fix. That seemed to open the floodgates to Yuan selling before it seems the State banks got busy and sold some dollars to knock USD/CNH and USD/CNY back.
That’s confused the position a little as to what SAFE and the PBOC want. But only in the short term. To me the yuan has been weaponised and the Chinese authorities are looking to neutralise the impact of the trade battle by weakening the yuan.
Where to next is interesting after US Treasury Secretary Steve Mnuchin's said on the sidelines of G20 that, "I’m not saying whether it’s a weapon or not a weapon. There’s no question that the weakening of the currency creates an unfair advantage for them…We’re going to very carefully review whether they have manipulated the currency".
The US is watching closely and even though Mnuchin said there won't be a currency war the risk for forex traders is that the US ups the rhetoric on any Euro or Yuan fall. It's clear President Trump sees currency as part of the trade battle.
So my answer to the question of "has the dollar turned" is yes. But only for the moment.
The move fits positioning, fits sentiment, fits the EW folks take on things, and fits what president Trump wants. Crucially the move fits the price action where Euro and many other currencies have held recent lows for many weeks. So a sharper reversal fits the narrative that has been developing about the US dollar so it’s got legs.
The positioning data from the CFTC I’ve followed for years helps explain some of this US dollar vulnerability to the Trump and Mnuchin comments as well as the technicals. That is, the big speculators are long US dollars and short all the major currencies save for the Euro which has a small long position still.
None of this is to say I’ve suddenly changed my view that policy and economic growth differentials don’t matter. That is not the case. Indeed my base case remains another 3 or 4 hikes from the Fed and strong data flow will arrest this US dollar reversal in time. But for the moment the CESI for the US and the Fed chair Jerome Powell himself have introduced a slowdown in the US into the debate over the past week or two. Again not a base case, a risk case. But a case which fits with everything else right now.
But, as the weekly euro chart shows price has recently consolidated in a range. So, to that end the 1.1850 region is the key to whether this US dollar reversal stalls quickly or whether the euro breaks and drags everything else with it. Should 1.1850 break then 1.1960 and 1.2060 come into the frame. All this could change Friday though with the release of what is expected to be a very strong Q2 US GDP. Plenty of water to flow under the bridge till then though.
DATA:
We’ll all still be eyeing China, its markets, and the yuan fix and subsequent moves. But other than that it’s quiet with the Chicago Fed National Activity index and existing home sales in the US the highlights.
Have a great day's trading.