Summary: The Euro and Swiss Franc outperformed against a generally weaker US Dollar in more stable markets. The Dollar Index (USD/DXY) stumbled to 95.67, October 2018 lows, as expectations grew that the Fed will slow its tightening pace. The Euro considered the most liquid of currencies, as well as the Dollar’s biggest Rival, responded as the yield gap between both continued to narrow. Global yields were stable with the US 10-year bond closing at 2.69%.
The Aussie, Kiwi and Loonie extended gains versus the Greenback on stronger commodity prices. USD/JPY finished with mild gains at 108.65 (108.50). EM currencies were modestly higher.
December US ISM Non-Manufacturing PMI slumped to 57.6 from 60.7 in November.
Markets were optimistic on trade talks between China and the US as they began in Beijing. Wall Street stocks lifted. The S&P 500 climbed 0.77%.
- EUR/USD – The Single Currency soared against the Greenback as the yield differential between US and Euro-area continued to narrow. The Euro traded to an overnight high of 1.14826 against the Dollar, closing at 1.1477, up 0.74% (1.1397 yesterday).
- AUD/USD – The Australian Dollar extended it’s rally against the Greenback, climbing 0.51% to finish at 0.7142 (0.7117 yesterday). Base metal prices were higher for the second day running.
- USD/DXY – The Dollar Index dropped to October 2018 lows to close at 95.67 from 96.20 yesterday. Despite a much stronger-than-expected US Payrolls number on Friday, the Dollar Index gave back gains after Jerome Powell’s remarks suggested the Fed may pause its rate hike path. The break and close below 96.00 may be a signal for further weakening.
On the Lookout – Trade talks continue in Beijing between the US and China. The upbeat outlook will be closely monitored in Asia today. The pattern lately has been a generally weaker Dollar on any improvement on the trade dispute between the two giants.
Today’s economic data sees Australian, Canadian and US Trade data, which will be significant in the current environment.
The partial shutdown of the US government drags on. The New York Times reported that President Trump will address the nation about the government shutdown.
Global bond yields stabilised yesterday. The benchmark US 10-year yield finished at 2.69% (2.67% yesterday). Germany’s 10-year Bond yield ended up 2 basis points to 0.22%. Australia’s 10-year bond yielded 2.27% from 2.23% yesterday. The yield differential between 10-year US and German has narrowed to 247 basis points from 265 bp in November. Further narrowing of this gap will see a higher Euro.
Trading Perspective: The Dollar faces a crucial test in the next few days with increasing chances of further downside breaks. The flash-crash in the USD/JPY last week may have been the catalyst. It’s not surprising that the Euro had its turn last night. A clean and sustained break above the 1.1500 level could see markets taking the Single currency further to 1.1800. This would bring the Dollar Index lower (EUR/USD carries almost 60% weight in the Index). USD/DXY traded to an overnight low of 95.638 with 95.50/60 now immediate and strong support.
The holiday-shortened week will delay the Commitment of Traders CFTC report on market positioning. This will continue to play a key role on where the currencies are headed next.
Emerging market currencies saw modest gains versus the Greenback. Any turnaround on these currencies will be USD supportive.
- EUR/USD – The Euro is poised to move higher should the gap between US and Euro-area yields continue to narrow. Immediate and strong resistance lies at the 1.1510/30 area. The Euro has held the 1.1240-1.1300 level well. The Single currency may be poised to move the range from 1.12-1.15 higher to 1.15-1.18 should we see a sustained break higher. Immediate support can be found at 1.1420 and then 1.1380.
- AUD/USD – The Australian Dollar has recovered from the flash-crash in the AUD/JPY cross where the Battler was plummeted to a low of 0.6730. The Aussie then rallied hard and fast, recovering to just above 70 cents. Last night, AUD/USD traded to 0.71496 highs before closing at 0.7143. Copper and base metal prices extended their gains which supported the resource currencies. Chinese moves to address the weakening economy and upbeat trade talks further boosted the Battler. A lower US Dollar will see further gains in the currency. The Aussie is not out of the woods yet. Immediate support at 0.7110 and 0.7070 should hold. Immediate resistance can be found at 0.7150 and then 0.7180 with 0.7210 strong. Australia’s trade data are out later with a forecast surplus of +AUD 2.18 billion from November’s +AUD 2.32 billion. Australian Building Approvals and Retail Sales are also due out later in the week.
- USD/DXY – The Dollar Index broke under 96.00 to close at 95.67, down 0.47%. Immediate support lies at 95.60 and a sustained break will lead to 95.20 and then 94.80. Immediate resistance can be found at 96.00 and then 96.30 followed by 96.60 (overnight high). The Dollar may be on the verge of further losses as waning expectations of US rate hikes build. The yield differentials between the US Dollar and its global peers will determine whether we can extend this corrective move further.
Happy trading all.