Originally published by AxiTrader
QUICK SUMMARY
The US dollar has had an okay night. That’s especially the case against the pound which has made a new low for this run after more worries about a hard Brexit surfaced following comments from a spokesman for PM May saying she still believes both that a deal will get done but also that no deal is better than a dud deal. GBP/USD is down 0.5% at 1.2943.
Euro is also lower after a shock 4% fall in German factory orders in June. But the weakness has only been mild as EUR/USD has respected range lows. It’s at 1.1553 down just 0.13% now. The yen has lost the same amount despite news breaking the BoJ had intended to jack rates up this year before the market funk in Jan/Feb and a lack of inflation got in the way. USD/JPY is at 111.37.
The commodity bloc has had similar moves as well with loses of between 0.1% and 0.15%. The AUD/USD is at 0.7388 despite the fall in copper of 1.36% in US trade. The RBA this afternoon will be interesting. No change is expected but any signs of dovishness will hurt the Aussie. The kiwi is at 0.6732 and USD/CAD is trading 1.2999.
BIGGER PICTURE
The USD has had a better day of it to start the week.
Sterling (see below) has broken below the recent range bottom, but the Eeuro, Aussie, yen and others are still holding range lows to different extents. The materially weaker than expected German factory orders for Jun has again reinforced the actual divergence in economic outcomes even though the US CESI score is below zero. It’s at -13.9 this morning with the EU score at -35.3. We’ll see how the data flows for the rest of the week including the important PPI and CPI data that closes out the week on Thursday and Friday. Any inflation uptick and the US dollar can surge, even with the weight of US dollar longs I highlighted in my piece yesterday.
But what’s important here is that whether it is the EUR/USD range bottom and support around 1.1490/1.1510 or whether it’s the US Dollar Index up near last nights high around 95.50 – the range has not broken yet. Close, but not yet.
I retain my US dollar bullishness. But I am constraining it in the immediate term unless of until I see a decisive break in euro and the DXY a little more broadly.
The pound is lower on Brexit related concerns as traders finally wake up to the fact the UK government has made a hash of the negotiations with the EU up to this point. What’s apparent to me in the statements we are seeing now is that having played the game as if it held the cards Theresa May’s team has now reverted to what it thinks will be a nuclear option. That is a non-deal Brexit is batter than a bad deal which is a signal to the EU that perhaps it has as much to lose from a disorderly Brexit as the UK does. But I’m struck by the image of the Sheriff holding himself up - with a gun to his head - in Blazing Saddles.
Anyway, Theresa May’s spokesman said overnight she still believes that no-deal is better than a bad deal but that Mrs May also believes a deal can be done. Those comments come after Liam Fox said the chance of a no-deal exit are as high as 60% and after BoE governor Mark Carney said the chance of a no- deal Brexit are “uncomfortably high”.
Naturally GBP/USD fell out of bed again and at 1.2940 is down half a percent. That makes it the weakest of the G10 currencies. The bottom of the current down trend channel is 1.2870/75 while the Fibo extension of the break overnight is 1.2800/10.
Oh, and just quickly again on China.
The move to impose the 20% haircut margin on forward purchases of US dollars announced last week in order to stem the tide of Yuan selling is a clear signal the Chinese are worried the USD/CNY surge is not over yet. But it’s also a clear sign that where they can they will try to do what the RBA does with the Aussie dollar in smoothing and testing in order to make sure it’s not just one way. But it’s a sign of weakness to forex traders who will be watching the reserve data this afternoon for any cracks in the dam.
DATA:
On the day the RBA is the big event here in Australia. No change is expected but we hear from the RBA – including today – three times this week so if they want to tweak or change their message this is the week to do it. So be on the lookout at 2.30pm AEST.
Offshore the highlight is going to be the German trade data and industrial production. Coming a day after the IMF popped the Germans for their surplus and the pressure it puts on other nations this will garner some coverage. House prices are out in the UK tonight and in the US its JOLTS and the IBD/TIPP optimism survey while in Canada we get the release of the Ivey PMI.
But the big data release given the Yuan’s slide and the trade war is probably the Chinese foreign reserves data at 6 pm my time this evening.
Have a great day's trading.