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Dollar Ends Mildly Lower, Inflation Rises, Bond Yields Climb

Summary: The Dollar Index (USD/DXY) ended marginally lower (97.056 from 97.127) despite a stronger-than-expected rise in US underlying consumer prices. In the second part of his testimony to the US Congress, Jerome Powell generally reiterated comments he made the previous day. Which affirmed market expectations of a 0.25% rate cut this month, offsetting the stronger-than-forecast rise in June US Core CPI to 0.3% against 0.2%. The Euro was unchanged at 1.1252 as expectations grew that the ECB would ease policy. USD/JPY closed marginally higher at 108.52 from 108.47, supported by higher US bond yields. The Australian Dollar firmed 0.22% to 0.6975 (0.6962) while it’s southern cousin the Kiwi climbed to 0.6662 from 0.6645. Both currencies continued to outperform on dovish comments from Fed officials. Federal Reserve Presidents Williams (NY) and Bullard (St Louis) and Kashkari (Minneapolis) added dovish support while Bostic (Atlanta) and Barkin (Richmond) saw no need to ease policy. US Bond Yields climbed further on the stronger-than-expected inflation number. Benchmark 10-year yield was up 8 basis points to 2.14%. Two-year yields firmed to 1.87% from 1.83% as the gap between short-term and long-term rates continued to deepen.

CNBC YTD 10-Year Bond Yield Chart - 12 July 2019
CNBC YTD 10-Year Bond Yield Chart – 12 July 2019

Wall Street stocks hit fresh record highs at the close. The Dow was up 0.85% to 27,090 while the S&P 500 gained 0.26% to 3,000. (2,993).
Euro area final CPI (Germany and France) both matched forecasts. US Headline CPI rose to 0.1% beating forecasts of 0.0% and matching May’s 0.1%. US Jobless Claims fell to 209,000 (f/c 220,000).

  • EUR/USD the Single currency finished flat at 1.1252 after trading to an overnight high of 1.12857. The ECB’s latest meeting accounts revealed that policymakers are ready to ease further as appropriate, reminding traders that the ECB is also on a dovish path.
  • USD/JPY – The Dollar edged higher against the Yen to 108.52 from 108.46 as US bond yields climbed sharply on the stronger-than-expected US Core Inflation report.
  • AUD/USD The Aussie and Kiwi continued to be the main beneficiaries of overall US Dollar weakness. AUD/USD rallied to 0.6975 at the close, up 0.22%. The trade truce between China and the US may be supportive to the Chinese economy and has buoyed the Aussie. Chinese Trade Balance is released later today.

On the Lookout: The Dollar fell back into familiar ranges which should extend to today. The US Federal Reserve has joined the RBA, RBNZ and ECB on the monetary policy easing path which evens the playing field. Last night’s US data reports were better than expected yet failed to lift the Greenback. Markets are broadly expecting a Fed rate reduction toward the end of this month.
Today’s data releases are light. New Zealand kick off today with their Business New Zealand Manufacturing Index.  China reports it’s June Trade Balance (surplus) in both Yuan and USD terms. Japanese Revised Industrial Production (June) follow. Europe sees German Wholesale Price Index.
European Finance Ministers meet in Brussels on the economic policies of the Eurozone.
US Headline and Core Producer Price Index (June) round up the day’s reports.

Trading Perspective: While the Dollar held its lows, there is still room for depreciation against its Rivals. Jerome Powell reiterated in his testimony earlier today that the Fed is on an easing path keeping his focus on global risks. Although Core CPI rose yesterday, beating forecasts, Powell reiterated that inflation is well below the Fed’s target of 2% and the US expansion may need an added boost.

Saxo Bank Bloomberg COT CFTC Report Table - 12 JUL 2019
Saxo Bank Bloomberg COT CFTC Report Table – 12 JUL 2019

Market positioning from the latest Saxo Bank COT/CFTC report (week ended 2 July) showed that speculators cut their net long US Dollar bets against 9 IMM currencies by a massive US$ 7.4 billion to just $12.4 billion, the smallest total since June 2018. The Dollar cuts were broad-based but concentrated against the Euro, Yen and Canadian Dollar. The exception was the Pound and Mexican Peso. This is an interesting development. As the long US Dollar market positioning corrects, it paves the way for less resistance for an overall USD rally. Specially against the Euro, Yen and Canadian Dollar.

  1. EUR/USD – The Euro reversed its up move that started yesterday to finish unchanged at 1.1252. EUR/USD traded to an overnight high at 1.12857 before easing at the New York close. Germany’s 10-year bond yield climbed 8 basis points to -0.23%, matching that of its US counterpart. According to latest Saxo Bank COT/CFTC report, speculative Euro short bets were further cut to a net total -EUR 31,733 (week ended 2 July) from the previous week’s
    -EUR 58,458. That’s huge. EUR/USD has immediate support at 1.1240 followed by 1.1210. Immediate resistance can be found at 1.1290 and 1.1320. Look to trade a range between 1.1240-1.1290 today.
  2. USD/JPY – The Dollar gained 0.15% against the Yen to 108.52. Higher US 10-year bond yields supported USD/JPY. Japan’s 10-year JGB yield was 2 basis points lower to -0.15%. Overnight high traded was 108.532. USD/JPY dropped to a low at 107.859 following Powell’s dovish testimony yesterday. The latest Saxo Bank CFTC report saw speculative JPY short bets cut further to a net total of -JPY 1,227 contracts (week ended 2 July) from the previous week’s
    -JPY 7,039. The net total is virtually square. USD/JPY has immediate resistance at 108.65 and 108.85. Immediate support lies at 108.30 and 108.10. Look for a likely trading range of 108.10-80. Prefer to buy dips near 108.00
  3. AUD/USD – The Aussie continued to benefit from the broad-based USD weakness, even as it slowed. AUD/USD closed at 0.6975 after testing a high at 0.6988. Traders will keep their eye on China’s June trade balance which is released later today. The latest Saxo Bank CFTC report saw speculators trim their short AUD bets to -AUD 58,735 contracts (week ended 2 July) from -AUD 66,320 the previous week. Unlike the Euro and Yen, Aussie market positioning is still short. Immediate resistance lies at 0.7000 and 0.7030. Immediate support can be found at 0.6950 and 0.6920. Look to buy dips in a likely 0.6950/7000 range today.
Daily FX GBP USD Chart - 12 JULY 2019
Daily FX GBP USD Chart – 12 JULY 2019
  1. GBP/USD – Sterling bounced off it’s lows yesterday following the dovish assessment of Fed President Jerome Powell. GBP/USD traded to a high at 1.25713 before settling to close at 1.2525 (1.2505 yesterday). On Wednesday the Pound slumped to 1.24438 as weaker UK economic data was seen to sway the BOE to consider their interest rate policy. Brexit jitters continue to dog the British Pound. The latest Saxo Bank CFTC report saw a further increase in net GBP short bets to -GBP 64,244 contracts (week ended 2 July) from -GBP 57,349. GBP/USD has immediate resistance at 1.2550 and 1.2580. Immediate support lies at 1.2500 and 1.2470. Look to buy dips with a likely range today of 1.25-1.26.

Happy Friday and trading all.