What’s Behind The Dollar Dumping?

Market Drivers January 15, 2018

  • Cable takes out 1.3800
  • Dollar Selloff relentless
  • Nikkei 0.26% DAX -0.28%
  • Oil $64/bbl
  • Gold $1343/oz.
  • Bitcoin $13700

Europe and Asia EUR: EZ Trade Balance 26B vs. 22B

The dollar was dumped across the board on the first trading day of the week, as the selling flows in Europe accelerated pushing GBP/USD through the 1.3800 figure and taking EUR/USD within a few pips of 1.2300.

There was no fundamental news for the move as the rally was pure momentum driven with stops triggering vicious short covering spikes in morning London dealing. After Friday’s dollar breakdown that saw both EUR/USD and GBP/USD post multi-month highs, today’s move was simply the continuation of those flows.

Although some analysts have stated that the current dollar weakness is simply the natural result of the global growth trade as relative growth rates pick up across the G-11 universe, we believe there are other factors at play. While the risk trade is undoubtedly part of the move, as witnessed by the rising prices in the commodity complex, the weakness in USD/JPY suggests there is more to dollar weakness than just the global feel-good story.

Yesterday, BOJ governor Kuroda reiterated the central bank’s commitment to QE and yet USD/JPY fell on the news, dropping to within a few pips of the 110.50 level by mid morning London trade. The weakness in the buck suggests that the move is political as well as economic as global investors grow increasingly concerned about the chaos in Washington DC.

This week the US Congress must pass a continuing budget resolution or face the prospect of the government shutdown. Most market participants believed that Congress would reach a compromise and pass the legislation. However, after the rancor of the past few days, the risk of the government shutdown has increased and that factor could be weighing on the dollar as well.

With no data on the docket today and US capital markets closed for MLK holiday, trading may settle down as the day proceeds, but the drama in Washington will dominate the flows this week and if no compromise is reached USD/JPY could slice through the key 110.00 support as the week proceeds.

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