DXY Advances to 2019 Highs, Global Stimulus Hopes Boost Risk

Summary: Optimism on stimulus hopes from Germany and China boosted risk which lifted the Dollar, treasury yields and stocks. The Bundesbank’s (German central bank) latest monthly report stated: “there is a risk the German economy could shrink again in the third quarter.” German Finance Minister Olaf Scholz reportedly said that Berlin could make available EUR 50 billion of extra spending in case of a slowdown. This saw EUR/USD retreat for the 5th day in a row to close at 1.1080, down 0.11%. Elsewhere, China is preparing to announce today details of their new Loan Prime Rate program (approx. 11.30 am Sydney time). Which replaces their fixed benchmark lending rate (updated every 20th of the month). Markets expect the fixed rate (4.35%) to be set lower. Risk appetite increased with the Dollar, treasury yields and stocks climbing. The Dollar Index (USD/DXY) rose 0.23% to 98.372, approaching 2019 highs. Haven darlings the Yen and Swiss Franc retreated. USD/JPY was up 0.29% to 106.62 (106.35) while USD/CHF advanced 0.49% to 0.9817 (0.9787). The Australian Dollar eased to 0.6765 (0.6775) ahead of today’s RBA August meeting minutes release.
Wall Street stocks rallied with the S&P 500 adding 1.05% to 2,922. (2,892). The benchmark US 10-year bond yield climbed 6 basis points to 1.61%. Germany’s 10-year Bund yield closed at -0.65% from -0.69% yesterday. Japan’s 10-year JGB yielded -0.24%, unchanged from yesterday.
New Zealand’s PPI Input and Output beat expectations. The Eurozone’s Final CPI (annual) slipped to 1.0% from the previous 1.1% and forecasts of 1.1%.

TRADING VIEW - DXY Chart - 20 August 2019
TRADING VIEW – DXY Chart – 20 August 2019
  • EUR/USD – slip-sliding away. The Euro retreated for the 5th day in a row to finish modestly lower at 1.1080 (1.1090 yesterday). The Bundesbank’s monthly report findings and comments by the German Finance Minister weighed on the shared currency. However, there was little movement ahead of next week Euro area PMI’s and Friday’s Jackson Hole summit.
  • USD/JPY – The Dollar rallied against the haven sought after Yen following the rise in US treasury yields. Risk-on stance by the markets on global stimulus hopes also buoyed USD/JPY. The latest COT/CFTC report saw little change to the overall speculative long USD positioning. Against the Yen (and Sterling), there are highlighted changes.
  • USD/DXY- while mainly a mirror of the Euro, the Dollar advanced against the Yen, Sterling and Swiss Franc. USD/DXY closed 0.23% higher to 98.372 from 98.203 yesterday. DXY was boosted by the climb in US bond yields and within striking distance of 2019 highs at 98.93.
  • AUD/USD – the Aussie stayed weak ahead of today’s RBA August meeting minutes release (11.30 am Sydney time). AUD/USD finished at 0.6765, down 0.18% from 0.6775. While RBA speak has been less dovish and economic data brighter, market sentiment toward the Battler is still bearish. The risk, according to this writer, could be for an Aussie short squeeze.

On the Lookout: The main event today is the RBA’s August monetary policy meeting minutes release. Economic data releases start off with the Swiss Trade Balance followed by German Producer Prices. The UK reports its CBI Industrial Order Expectations. Canada reports its Manufacturing Sales for August. New Zealand’s Global Dairy Prices are also released early tomorrow morning.
Traders will be focussed on China today with the new interest rate mechanism paving the way for lower borrowing costs to businesses.
On the trade front, tensions eased with the announcement that the US is granting Chinese tech giant Huawei a 90-day extension with which to buy components from US companies to supply their customers.

Saxo Bank - Bloomberg COT CFTC REPORT - 20 AUG 2019
The Jackson Hole Symposium for the world’s central banks which begins on Friday with a speech by US Fed Chair Jerome Powell is the week’s big event.

Trading Perspective: Amidst the plethora of news items, FX stayed well within established ranges. The Dollar Index extended its grind higher, this time against a broader range of currencies. The bounce back in US treasury yields have been a solid support for the Greenback, and we would need to see more yield support for a move higher.

The latest COT/CFTC report (week ended 13 August) saw total net speculative US Dollar long bets pretty much unchanged. Speculators increased their net long US Dollar bets against the Euro, Aussie and Canadian Dollar. Versus the British Pound, specs cut their short Sterling bets. The biggest move came against the Japanese Yen where speculative long JPY bets increased +JPY 25,000 lots, to their biggest total since November 2016.

  1. EUR/USD – The Euro remains under pressure with all the stimulus rhetoric coming out of Europe of late. EUR/USD grinded lower top close at 1.1080, trading to a low of 1.10762. Overnight high for the Euro was 1.11138. Lately, Euro area economic data has underperformed. On Thursday, crucial Euro area and Eurozone Manufacturing and Services PMI’s for August are due. Should the PMI’s be weaker than expected, the Euro will test recent lows of 1.1027. Immediate support lies at 1.1070 followed by 1.1040. Immediate resistance can be found at 1.1100 and 1.1120. The latest COT report saw speculative short Euro bets increase to -EUR 46,649 bets from the previous week’s -44,010 bets. Look to trade a likely range of 1.1060-10. Prefer to buy dips.
  2. AUD/USD – the bearish sentiment on the Aussie stayed intact with the US Dollar gaining strength on a broad base. While risk rallied, Emerging Market currencies ended lower against the Greenback. Higher US yields contrast with market expectations of lower Australian rates. Markets are still looking for a dovish bent from the RBA. AUD/USD closed at 0.6765. Immediate support on the day can be found at 0.6740 followed by 0.6710. Immediate resistance lies at 0.6800 and 0.6840. The latest COT/CFTC report saw speculative Aussie short bets increased to -AUD 62,912 bets (week ended 13 Aug) from last week’s -55,571. That’s a decent rise. Let’s not forget that the Aussie Dollar TWI is at multi-year lows. The risk is for a short squeeze soon. Today’s likely range will be 0.6745-0.6795. Prefer to buy dips.
DAILY FX - USD JPY Chart - 20 AUGUST 2019
DAILY FX – USD JPY Chart – 20 AUGUST 2019
  1. USD/JPY – The Dollar rose to finish at 106.62, up 0.29% on higher US yields and a more positive market risk profile. USD/JPY traded to an overnight high at 106.697. Immediate resistance lies at 106.70 followed by 107.00. Immediate support can be found at 106.30 (overnight low 106.244) and 106.00. The latest COT/CFTC report (week ended 13 August) saw speculative JPY long bets increase by a hefty +JPY 14,181 contracts to total +JPY 24,742 bets, the biggest net long JPY total since November 2016. Which isn’t surprising given current market sentiment. Look to trade a likely range today of 106.25-106.95. Prefer to buy dips.

Happy trading all.