Risk Appetite Jumps, Dollar Climbs, Yen Slumps to 8-Month Lows

Summary: Appetite for risk returned with a vengeance following a trifecta of positive news for markets. First, Chinese authorities reported that the daily rise of new coronavirus cases recorded the lowest total since January 29. Sentiment was further boosted following a Bloomberg news report that Beijing was considering injecting liquidity or mergers to bail out airlines hit by the virus. Upbeat Building Permits and Housing Starts showed that the US housing market remains on solid footing. Against the haven sought after Japanese Yen, the Dollar jumped 1.44% to an overnight and May 2019 high at 111.576, settling at 111.32 in early Sydney. The British Pound dropped to 1.2920 (1.2998) despite an unexpected rise in UK inflation as focus returned on the trade talks between the European Union and Britain. The Euro closed at 1.0800, up marginally from 1.0795 yesterday after the market tested an overnight low of 1.07823 where solid bids supported the shared currency. Ahead of today’s Australian Employment report, the Aussie dipped further to 0.6675 (0.6687) weighed by the overall stronger US Dollar. The Dollar Index (USD/DXY), a popular gauge of the Greenback’s strength against six other major currencies rose 0.25% to 99.693 (99.434), its strongest finish since early May 2017. Global equities rallied. The US S&P 500 reached record highs at 3,394, closing at 3,390. Up 0.55%.

FX Factory - US BUILDING PERMITS - 20 February 2020
FX Factory – US BUILDING PERMITS – 20 February 2020

Japanese Core Machinery Orders fell to -12.5%, lower than the -9.0% median expectations. UK Headline CPI rose at an annual 1.8%, beating expectations of 1.7%. Core CPI was up 1.6% against forecast of 1.5%. US Housing Starts dipped to 1.55 million units from the previous month’s 1.61 million units but bettered forecasts of 1.45 million. Building Permits soared to a rate of 1.55 million units in January, up 9.2% and the highest level since 2007.

IG Daily FX USDOLLAR YEN Chart (1D) - 20 February 2020
IG Daily FX USDOLLAR YEN Chart (1D) – 20 February 2020
  • USD/JPY – the Dollar soared beyond 110 Japanese Yen climbing to an overnight and May 2019 high at 111.576 before easing to settle at 111.32 in early Sydney trade. The triple whammy of risk-on, upbeat US data, downbeat Japanese data, and rising equity markets saw traders pile out of the traditional haven Japanese currency.
  • EUR/USD – after a few days of pummelling from FX, the Euro managed to hold aggressive selling by the sheer number of shorts and solid bids at the overnight lows of 1.07823. With the Euro approaching May 2017 lows and a short speculative market, the shared currency finished 0.08% higher at 1.0800.
  • AUD/USDslip sliding away, the Australian Dollar slipped to 0.66653 multi-year lows on broad-based US Dollar strength before settling at 0.6677. Australia’s monthly Employment report is due today. Possible fireworks ahead.

On the Lookout: Today sees a data dump for markets. New Zealand starts off with its Q4 PPI Input and Output data, both of which are expected to be lower than the previous quarter.
Australia’s January Employment report follows next. The Australian economy is forecast to have created 10,000 jobs for January against December’s 28,900. The Unemployment rate is expected to climb to 5.2% from 5.1%. Euro area data follow next with Switzerland’s Trade Balance.
German GFK Consumer Climate and PPI follow. The UK reports on its CBI Industrial Orders Expectations. The latest ECB Monetary Policy Meeting minutes is released shortly after. The US reports on its Philadelphia Fed Manufacturing Index which bears watching as it’s the first of the UAS factory outputs. Finally, the US Conference Board reports its Leading Index.

Trading Perspective: Although the US Dollar was broadly higher against most major and EM currencies, it’s strong up move was mostly a catch up with the Yen, which fell as much as 1.44% against the Greenback. The Euro ended higher against the Greenback. Overnight, US and global bond yields were little changed. At the risk of sounding like a broken record, without yield support, its difficult to see the Dollar gain further significant ground. Watch the Euro, this may be the key.

  1. EUR/USD – The shared currency dipped to overnight and fresh May 2017 lows at 1.07823 before bouncing to 1.0807, currently trading in Sydney. Sentiment on the Euro is still decidedly bearish and so far the bounces have been “dead-cat.” However, a more decent short-covering rally may be on the cards soon. A higher Euro may lead the overall US Dollar lower. Immediate resistance for today is found at 1.0810 followed by 1.0840. A sustained break above 1.0840 could see 1.0870 and the EUR/USD stabilise. Immediate support lies at 10.0780 followed by 1.0740. Look to trade a likely range today of 1.0795-1.0855. Prefer to buy dips.
  2. USD/JPY – The Dollar gapped higher once we broke above 110.00 convincingly. USD/JPY currently trades at 111.30. Immediate resistance on the day lies at 111.60 followed by 112.00. Immediate support can be found at 110.70 followed by 110.30. The contrasting combination of upbeat US and downbeat Japanese data will support the Dollar. However, we may be overdone up here. Look for consolidation today with a likely range of 110.70 and 111.40. Prefer to sell rallies.
IG Daily FX Aussie Dollar Chart - 20 February 2020
IG Daily FX Aussie Dollar Chart – 20 February 2020
  1. AUD/USD – The Australian Dollar failed to gain ground despite the risk on stance by the market. The overall stronger US Dollar and a dovish leaning RBA has put the Aussie Battler under pressure. AUD/USD has immediate support at 0.6665 followed by 0.6625. Immediate resistance lies at 0.6705 (overnight high 0.67077). The next resistance level is found at 0.6730. Much depends on the Australian Employment report today. An employment gain of over 10,000. (15,000 or more) will see a short squeeze. Anything less than 5,000 or negative will see the low 0.66/s tested. Stand aside for now but look for opportunities to trade. Buy between 0.6640/60. Won’t sell until 0.6740 or higher.
  2. USD/DXY – The Dollar Index traded to a high at 99.722 before settling at 99.693. USD/DXY has immediate resistance at 99.80 followed by 100.00. Immediate support lies at 99.50 followed by 99.10. Look for consolidation today with a likely range of 99.35-75. Prefer to sell rallies. A rebound on the EUR/USD will see the Dollar Index drop.

Happy trading all. Feel free to share your thoughts.