A number of developments are worth highlighting that we think support our view of more medium-term USD weakness.
The dollar rebound since 26 January (the beginning of the equity sell off) has been quite modest, a mere 1.3% in trade-weighted terms. Furthermore, emerging-market currencies have not been heavily penalized, which is especially remarkable when considering the strong rally they have enjoyed since mid-November of last year. In fact, CNY has actually appreciated against the greenback (+0.5% during the period) despite news of a potential relaxation of controls on Chinese capital outflows. Moreover, implied currency volatility has risen, but in a well-behaved manner, and is still low compared to historical averages – even though the VIX has been propelled above 30. In our view, the recent currency moves reflect more an element of a short-term correction due to large USD-shorts, and far less any re-assessment of fundamentals or flight to safety.
Regarding fundamentals and safe haven demand, it is really hard to see the dollar benefiting in a period during which US fiscal policy is heading in exactly the opposite direction to the way it should be. An expansion of the budget deficit (towards 5% of GDP) when the economy is at full employment, is threatening to throw USD-denominated assets into a vicious feedback loop of higher risk premia and increasing vulnerability to a potential downturn (due to a compromised fiscal cushion). In that respect, it is worth remembering that over the last thirty years or so, periods that saw the US federal budget deteriorate were associated with dollar weakness.
Add to the above the fact that the global upswing is at a far earlier stage in the cycle compared to that in the US, and you can see why the story of the reshuffling of flows outside of the US has plenty of room to run. On balance, we think this recent euro-weakness is close to an end, while we still favor USD/JPY downside.
EUR/USDTrading strategy: LongOpen: 1.2220Target: 1.2450Stop-loss: 1.2120Recommended size: 2.00 mini lots per $10,000 in your accountShort analysis: The EUR/USD recovered slightly, but is still below 14-day ema. A come back above 23.6% retrace of November-January rise will be an important bullish sign and confirmation of our long position.Previous position: Long opened at 1.2050, profit taken at 1.2400, earned: 350 pips, $466 per $10,000 in your account
GBP/USDTrading strategy: LongOpen: 1.3780Target: 1.4200Stop-loss: 1.3670Recommended size: 1.36 mini lots per $10,000 in your accountShort analysis: We used Friday’s sell-off to open a long GBP/USD position at 1.3780. GBP/USD bulls found a footing ahead of 1.3745, 38.2% retrace of the 1.2774 to 1.4346 rise. Another solid support level is 1.3798 (61.8% Fibonacci level of January rally). A close above the above-menitoned support levels should provide backwind to EUR/USD bulls.Previous position: Long opened at 1.3650. Profit taken at 1.4100, earned: 450 pips, $450 per $10,000 in your account USD/JPYTrading strategy: ShortOpen: 110.00Target: 107.50Stop-loss: lowered to 110.00Recommended size: 1.31 mini lots per $10,000 accountShort analysis: Despite recent volatility in financial markets the bearish USD/JPY trend remains intact. Now we need a break of Friday’s 108.05 low and the 108.00 psychological level. 14-day momentum remains negative, this has been the case since January 9.Previous position: Short opened at 112.00. Profit taken at 109.50, earned: 250 pips, $374 per $10,000 in your account USD/CADTrading strategy: SellOpen: 1.2650Target: 1.2300Stop-loss: 1.2765Recommended size: 1.68 mini lots per $10,000 accountShort analysis: Market bets that the Bank of Canada will hold in March edged up to 92.1% after the data, though odds of a hike by May were at nearly 80%. The central bank has raised rates three times since last July. The CAD weakened against the greenback following the report before reversing to trade modestly firmer. We used Friday’s jump to open a short position at 1.2650. We can see some signs of improvement in risk appetite today, which means a higher demand for commodity currencies.Previous position: Short opened at 1.2650. Profit taken at 1.2300, earned: 350 pips, $475 per $10,000 in your account AUD/USDTrading strategy: LongOpen: 0.7785Target: 0.8100Stop-loss: 0.7690Recommended size: 1.58 mini lots per $10,000 accountShort analysis: A bull hammer formed on the daily chart on Friday, which supports our bullish view.Previous position: Long opened at 0.7670. Profit taken at 0.7990, earned: 320 pips, $480 per $10,000 in your account EUR/GBPTrading strategy: BuyOpen: 0.8815Target: -Stop-loss: -Recommended size: -Short analysis: EUR/GBP scope grows for gains to the 30-day upper Bollinger-band, which is currently at 0.8926, just above the 0.8924 Fibonacci level – 38.2% retrace of the 0.9307 to 0.8687 fall. 14-day momentum remains positive, reinforcing the overall bullish bias. We are looking to get long on dips.Previous position: Short opened at 0.8850. Profit taken at 0.8810, earned: 40 pips, $120 pips per $10,000 in your account