Summary: The Dollar edged higher, boosted by solid US Services and New Home Sales data. Both beat expectations with the ISM Non-Manufacturing Index rising in February after falling the previous month. USD/DXY (Dollar Index) rallied to finish at 96.864, up 0.23%. The Euro took the brunt, extending losses on the market’s dovish outlook on tomorrow’s ECB meeting. EUR/USD fell 0.28% to 1.1305 at the close after trading to a 2-week low at 1.12895. Elsewhere, the RBA left rates unchanged, maintaining an optimistic outlook on the Australian economy. The Australian Dollar finished flat at 0.7087 after initially rising to 0.7097. EM Currencies reversed their slide against the Greenback, finishing mostly up.
China lowered its growth target to a band between 6-6.5% for 2019. The previous practice of using a point figure, “around” 6.5% for 2018 was abandoned to give policymakers more room to steer the economy.
Stocks and bonds ended little-changed. The DOW and S&P 500 closed virtually flat. The yield on the US ten-year bond was unchanged at 2.72%.
In data released yesterday, China’s Caixin Services PMI fell to 51.1 against 53.5 forecast. Euro-area Final Services PMI mostly beat forecasts. The US ISM Non-Manufacturing PMI rose to 59.7 in February, beating expectations of 57.4 and January’s 56.7. US February New Home Sales jumped to 621,000 units versus a forecast of 597,000 and a downwardly revised 599,000 for January.
- EUR/USD – The Single currency took the brunt of the Dollar’s rally on trader’s expectations of a dovish ECB, falling to an overnight and 2-week low at 1.12895. EUR/USD steadied to settle at 1.1307 at the New York close.
- AUD/USD – traded a relatively tight range, initially climbing to 0.70969 after the RBA left rates unchanged and kept an optimistic outlook on the economy. The lower Chinese Caixin Services PMI and shift in the growth target weighed on the Australian Battler. AUD/USD ended little-changed at 0.7087 (0.7090 yesterday). Lower metal prices (copper, iron ore and zinc) also kept the Aussie from climbing further.
- USD/DXY – The Dollar Index grinded it’s way higher to 97.008, a strong resistance level, before settling to close at 96.864. The Index, a measure of the US Dollar’s value against a basket of foreign currencies has 57.6% of its weight in the Euro. Which was the principal driver of the USD/DXY higher.
On the Lookout: The solid US services and home sales data which lifted the Greenback merely offset yesterday’s downbeat ISM Manufacturing and Construction Spending report. Euro-area Services data were mostly better than expected. There were no new developments on trade talks between China and the US. Yet the Dollar Index continues to grind higher. Two reasons why: 1. The US economy, while slowing down, is still growing faster than the rest of the world. 2. Traders believe that the Fed may still raise interest rates, while the rest of the world stand pat, or may even lower rates. Friday’s US Payrolls data may be crucial in changing this dynamic. And hopefully, shake up this low volatility.
Today’s data and events start off with RBA Governor Philip Lowe speaking on “The Housing Market and the Economy (soon) at the Australian Financial Review’s Business Summit in Sydney, Australia releases its Q4 GDP report. Canada reports on its Trade Balance and Q4 Labour Productivity before the Bank of Canada announces its decision on rates and releases its rate statement. The BOC is expected to keep its Overnight Rate unchanged at 1.75%. The US releases its ADP Private Employment Change and Trade Balance. Finally, the Fed releases its Beige Book.
Trading Perspective: Last night’s move was more of a Euro move than a Dollar move. The market remains bearish on the Single currency, expecting a dovish ECB policy and outlook. We reported yesterday that speculators increased their net short Euro positions to the biggest since 2017. This would have increased in the past two weeks given the move down in the Euro. Euro bearishness has also led to US Dollar bullishness. Net speculative US Dollar longs lifted to their biggest level in 4 weeks, which has also risen in the past two weeks. Apart from the Euro, Dollar longs increased against the Yen, Sterling, Swiss Franc, Aussie, Canadian Dollar, and Kiwi.
EM currencies have arrested their slide against the Greenback. Which is almost always a sign that short-term Dollar strength may be over with.
The US 10-year bond yield was unchanged at 2.72%. Almost 24 hours after the ECB policy announcement comes the US Non-Farms Payrolls. Both of which could change the direction of the Dollar. And add some good old-fashioned volatility back!
- EUR/USD – The Euro’s slide extended after failing to 1.1420 last Friday. It has immediate and good support at 1.1280 followed by 1.1230. Only a combination of a dovish ECB and solid US Jobs data could shake us out of the recent 1.1250-1.1450 range. Keep in mind that short Euro market positioning is at its largest in over 2 years. Immediate resistance can be found at 1.1340 followed by 1.1380. For today look for a likely range of 1.1290-1.1390. Would not want to be short under 1.1300.
- AUD/USD – The Aussie held steady despite China’s lower than forecast Caixin Services data and a switch to a lower growth band by the Chinese government. The RBA left its rates unchanged and maintained an optimistic outlook on the economy. Today’s GDP report will be crucial for the Battler. Q4 GDP is forecast to have grown 0.3 % from the previous 0.3%. The annual growth rate is forecast to slip to 2.5% from the previous quarter’s 2.8%. Anything above this forecast will see the Aussie trade higher. Speculators increased their net Aussie short bets in the latest Commitment of Traders report. AUD/USD has immediate support at 0.7060 (overnight low of 0.7059). The next support level is at 0.7030 (strong). Immediate resistance can be found at 0.7100 followed by 0.7130. Look to trade a 0.7070-0.7120 range today with the preference to buy dips.
- USD/DXY – The Dollar Index traded to an overnight high and 2.1/2 week high at 97.008 before settling at 96.864 at the close. The immediate resistance at 97.00 is strong and that should hold for today. The next resistance level is at 97.20 and 97.50. Immediate support lies at 96.70 and 96.40. Look to trade a range today of 96.60-97.00. Prefer to sell rallies given the market’s long Dollar positioning.
Happy trading all.
