Euro Weakens, Dollar Modestly Higher, Risk Appetite Ebbs

Summary: The Euro underperformed, weakening to 2-week lows (1.1309 o/n low) ahead of this week’s ECB meeting. ECB policymakers are expected to leave rates unchanged amidst a deteriorating outlook. EUR/USD ended down 0.25% at 1.1340. The Dollar Index (USD/DXY) was modestly higher, up 0.24%% to 96.61, largely due to the Euro’s fall. Traders shrugged aside President Trump’s weekend speech criticising Federal Reserve policy and “very strong Dollar”. The Australian Dollar was steady, up a modest 0.2% to 0.7091 ahead of today’s RBA rate announcement and policy statement. The RBA is expected to keep the cash rate at an all-time low of 1.5%.

Saxo Bank - Bloomberg Commitment of Traders Report, week ended 19 Feb - 5 March 2019
Saxo Bank – Bloomberg Commitment of Traders Report, week ended 19 Feb – 5 March 2019

Risk appetite waned as the timing and details of a trade deal between China and the US remained unclear. Wall Street stocks fell while treasuries rallied. The S&P 500 slid 0.5% (2,791, while the DOW ended down 0.85%. The yield on the US 10-year treasury fell back 3 basis points to 2.72%.
In data released yesterday, the Euro-Zone Sentix Investor Confidence Index beat forecasts, falling to -2.2% against -3.1%. US Construction Spending saw a surprise fall to -0.6% against a forecast of +0.2%.
Saxo Bank reported that speculative market positioning (for the week ended Feb 19) was decidedly long US Dollar bets in seven out of nine IMM currencies.

  • EUR/USD – the Single currency weakened to an overnight and 2-week lows at 1.3309 before steadying to end at 1.1340 from 1.1364 yesterday. Market dovishness ahead of the ECB meeting is weighing on the Single Currency.
  • AUD/USD – The Battler rose to 0.7091 from 0.7089 yesterday ahead of today’s RBA rate announcement and policy statement. Australian policymakers are expected to keep the cash rate unchanged, at an all-time low of 1.5%. All eyes will be on the RBA’s outlook for the economy and the cash rate. Most analysts (90%) are looking for a neutral outlook with the 10%, dovish.
  • USD/JPY – The Dollar finished little-changed against the Yen, down 0.07% to 111.75 (111.95 yesterday). Japan’s 10-year JGB yield ended at -0.02%, up one basis point from -0.03% yesterday while the US 10-year bond yield fell to 2.72% from 2.75%.

On the Lookout: The Dollar nudged against most of its peers despite weaker-than-expected US data and less certainty on a trade pact between China and the US. Most of it’s gains came through a weakening Euro where dovishness on the ECB policy meeting is high. The EUR/USD carries a 57.6% weight in the Dollar Index (USD/DXY) which a measure of the value of the US Dollar against a basket of foreign currencies. The Dollar Index climbed to 96.80, overnight and 2-week highs before settling at 96.68. However, the retreat in the US 10-year bond yield will prevent the Dollar from rallying much further.

Trading Perspective: Without yield support, the Dollar will struggle to move much higher. Benchmark US 10-year yield slipped back to 2.72% from 2.75%. Germany’s 10-year Bund yield ended 3 basis points down at 0.15%. Traders are going into the ECB meeting with a bearish bent on the Single currency. Market positioning on the Euro is decidedly short. Saxo Bank reported that the latest Commitment of Traders CFTC report (for the week ended 19 February), saw net speculative US Dollar longs increase to their highest level in 4 weeks (+USD 24 billion). Most of these Greenback longs were against the Euro. Net speculative Euro shorts rose to -EUR 74,934 contracts, a 2-year high. Total net speculative USD longs were still lower than the high’s reached in December (+USD 32 billion).

  1. EUR/USD the Euro has immediate and strong support near its overnight lows at 1.1309. The next support level can be found at 1.1280/90. Immediate resistance lies at 1.1360 followed by 1.1380. Look for a likely trading range today of 1.1315-1.1375 with the preference to buy on dips today.
Daily FX.COM - AUD USD Hourly Chart - 05 March 2019
Daily FX.COM – AUD USD Hourly Chart – 05 March 2019
  1. AUD/USD – The Australian Dollar saw modest gains against the Greenback, finishing at 0.7092, just under 0.71 cents. The RBA is expected to keep its cash rate at 1.5%. Most analysts and traders forecast the RBA outlook on the cash rate to be neutral. There are still some who believe the Australian central bank will cut rates, with the soonest being in April. That should keep the Aussie’s topside limited. Market positioning remains decidedly short. Net speculative AUD shorts increased to -AUD 37,068 bets in the week ended 19 February. The market is also slightly bearish going into the RBA meeting. While this is the case, the Aussie’s downside is limited. Immediate support lies at 0.7075 (overnight low), followed by 0.7060. Immediate resistance can be found at 0.7100 and 0.7130. Look to buy dips in at 0.7070-0.7170 range today.
  2. USD/JPY – slip-sliding away, the Dollar slid to 111.75 from 111.95 yesterday. While yield differentials widened over the weekend, they narrowed last night. Japan’s 10-year JGB yield was up to -0.02% from -0.03%, while the US 10-year yield fell to 2.72%. The latest Commitment of Traders report (week ended 19 Feb) saw net speculative JPY shorts increase to -JPY 37,461 bets from the previous week’s -JPY 30,742. Immediate resistance on USD/JPY lies at 111.90 followed by 112.10. Immediate support can be found at 111.60 (overnight low 111.64). The next support level is found at 111.30, then 111.00. Look to sell rallies in a likely range today of 111.20-111.90.

Happy trading all.