Summary: The Dollar dropped against all its rivals while the benchmark US 10-year bond yield slumped 10 basis points to 0.73% following a dovish Federal Reserve. The Fed kept interest rates unchanged (0-0.25%) as expected but policy makers signalled that rates would remain at current levels until 2022. The US central bank also said it would continue to buy Treasuries at its current pace over the coming months. Federal Reserve Chair Jerome Powell warned that the US faces a long road to recovery, pledging to continue to support the economy for “as long as it takes”. The likelihood of no US rate hikes for the next 12-18 months hurt the Greenback, boosting currencies. Wall Street stocks initially rallied but turned lower at the close following Powell’s speech. The Aussie, Kiwi, Canadian Loonie, Euro and Sterling all climbed to multi-months peaks against the US Dollar but trimmed their gains at the New York close. Against the haven Yen, the Dollar slumped 0.67% to finish at 107.15 (107.75 yesterday). The Australian Dollar jumped to 0.70643, overnight and 11-month highs before slipping to 0.6995 (0.6965 yesterday). The Euro closed at 1.1375 after trading to 1.14223, near 3-month highs. Sterling climbed to 1.28133, highs not seen since March, before falling to 1.2747 in late New York. The USD/CAD pair plunged to 1.33149, multi month lows, rallying to 1.3408, little changed from 1.3415 yesterday. Wall Street stocks finished lower. The DOW slipped 1.15% to 26,974 (27,278) while the S&P 500 settled at 3,187 (3,207), down 0.65%.
Data released yesterday saw Japan’s Core Machinery Orders slump in May to -12.0%, missing expectations of -7.5%. China’s CPI fell to 2.4% on an annual basis, lower than forecasts at 2.7% while PPI dropped to -3.7% against expectations of -3.2%. US Headline and Core CPI both slipped to -0.1% (versus forecasts at 0.0%).
On the Lookout: The spotlight now falls in the upcoming economic reports from the rest of the world. Expected improvements in upcoming US data will limit Greenback losses. The jury will be out on data coming from Europe, the UK, Japan, China, and Asia. Today sees Japan’s BSI Manufacturing Index and Australians M1 Inflation Expectations. Europe follows with French Final Private Payrolls (Q1), Italy’s May Industrial Production. The US rounds up today’s reports with its Headline and Core PPI, and Weekly Unemployment Claims.
Trading Perspective: The bounce back in the US Dollar and drop in equities post-FOMC highlight their overextended positions. Markets have been driving stocks and currencies higher for the past few weeks and are ripe for a correction. Comments from Fed Chair Jerome Powell suggested that while the US faces a long road to recovery, the worst is over. We look at a few individual currencies.
AUD/USD – Trims Post Fed Rally to 11-Month Highs, Risks Correction
The fall in equities and currencies post Fed outcome and statement saw the Australian Dollar back off its July 2019 high at 0.70643 to 0.6992 in early Asia. Chinese data released yesterday saw a fall in CPI and PPI. While over the weekend, China’s Trade Surplus may have jumped, but it was the result of a fall in both exports and imports. The Australian Dollar shrugged these off, boosted by the climb in equities.
AUD/USD will find the going above 0.70 cents difficult without a decent correction. The Aussie Battler’s impressive move higher is overextended. Overnight price action reveals that. AUD/USD has immediate resistance at 0.7030 followed by 0.7070. Immediate support can be found at 0.6960 followed by 0.6930. Look for a likely trading range today of 0.6930-0.7030. Prefer to sell rallies.
USD/CAD – Solid Bounce from 3-Month Lows Risks Higher
The US Dollar bounced off overnight and 3-month lows at 1.33149 to finish at 1.3408 in late New York, little changed from yesterday’s 1.3415. Oil prices were steady overnight with Brent Crude mildly higher at USD 41.00 from USD 40.80. The Greenback’s move lower against the Canadian Loonie is overextended and the solid bounce back suggests a much-needed correction is underway.
USD/CAD has immediate resistance at 1.3435 followed by 1.3475 and 1.3510. Immediate support can be found at 1.3370 followed by 1.3340 and 1.3310. Look for consolidation in the USD/CAD pair between 1.3370-1.3520. Prefer to buy USD/CAD dips.
EUR/USD – Hits Fresh 3-Month Highs, Overextended, Correction Due
The Euro climbed to a fresh 3-month high at 1.14223 overnight before easing to settle at 1.1375 in New York, up 0.3% from 1.1335 yesterday. Euro bulls continued to drive the shared currency higher. Broad-based Dollar weakness was the catalyst for the Euro’s move north. Germany’s 10-year Bund yield closed 2 basis points lower to -0.33%. The US key 10-year rate was down 10 basis points to 0.73%. The narrowing yield gap will be supportive for the Euro.
The Euro’s up move is overextended. We highlighted earlier this week that speculative Euro long bets rose to +EUR 81,240 contracts from the previous week’s +EUR 75,222. The EUR/USD pair is begging for a correction.
EUR/USD has immediate resistance at 1.1400 followed by 1.1430. Immediate support can be found at 1.1340 followed by 1.1280. Look to sell rallies in a likely range today of 1.1280-1.1410.
