Risk Roars Back, Dollar Extends Drop as Spec Longs Bail
Summary: The US Dollar fell across the board even as global risk assets recovered on hopes of a coordinated central bank response to the coronavirus crisis. Heightened FX volatility saw
Summary: The US Dollar fell across the board even as global risk assets recovered on hopes of a coordinated central bank response to the coronavirus crisis. Heightened FX volatility saw choppy trade in what traders know as the “twilight zone” (the transition from the New York close and Asian open). The action was fast and furious. The Euro outperformed, climbing to 1.1185, as speculative shorts scrambled to cover. The ECB said in a prepared statement: “we stand ready to take appropriate and targeted measures, as necessary and commensurate with the underlying risks.”
The latest Commitment of Traders/CFTC report (week ended 25 Feb) saw total net speculative Euro short bets at a 38-month high. EUR/USD eased to 1.1132 as equities bounced. Euro area Manufacturing PMI’s were mostly upbeat and triggered the Euro’s up move. On the other side of the Atlantic, US manufacturing sector activity slowed as COVID-19 hit supply chains. US ISM Manufacturing Index fell to 50.1 from 50.9 missing forecasts at 50.5. The Dollar Index (USD/DXY) which measures the Greenback’s strength against a basket of foreign currencies, slipped further to 97.60 (98.127), down 0.4%. The Australian Dollar lifted 0.44 % to 0.6535 from 0.6485 on the broad-based US Dollar fall. All eyes on the RBA rates policy meeting today, (2.30 pm Sydney time). The RBA is widely tipped to trim its Overnight Cash Rate to 0.5% from the current 0.75%. Sterling, once again, underperformed, dipping 0.3% to 1.2775, 4.1/2-month lows as traders remained cautious ahead of Brexit talks between the UK and the EU. Market positioning on the British currency remained long GBP bets which is also weighed on the currency. The DOW was up 3.6 %, while the S&P 500 gained 3.12 % at this time of writing. Wall Street stocks rocketed just at the close.
On the Lookout: It’s all about the Aussie today. The RBA is widely expected to cut its Overnight Cash Rate (prime lending rate) to 0.5% from 0.75% at the conclusion of its policy meeting today (2.30 pm Sydney time). That said, surprise cannot be ruled out, as is the case in FX. The Australian Dollar stayed positive, hovering near around 0.6535 on the elevated risk assets.
Speculation runs high that the upcoming G7 summit in the US will see finance ministers and central banks provide stimulus.
Australia kicks off today’s economic data with its Building Approvals and Current Account. Japanese Consumer Confidence follows. Euro area reports see Swiss GDP (Q4), Spanish Unemployment Change, Italian Monthly Jobless rate, Eurozone Headline and Core Flash CPI, PPI, and Unemployment rate. The UK reports on its Construction PMI. The US Wards Total Vehicle Sales number rounds up the day’s data.
Trading Perspective: Expect FX to consolidate first up within the ranges that have been established in the last 24 hours. Market positioning saw an increase in total net speculative US Dollar long bets. This will see further Dollar selling as the Fed takes the lead in providing the necessary stimulus response to the coronavirus crisis. The latest Commitment of Traders report from Saxo Bank saw net total speculative US Dollar long bets jump 49% in the latest week ended 25 February to the most since 11 December 2019. The bulk of these longs were against the Euro and Yen.
EURO Outperforms as Shorts Scramble for Cover
EUR/USD – The Euro outperformed FX as speculative shorts scrambled to cover their positions against the broad-based weaker US Dollar. The shared currency rocketed to an overnight and near 2-month high at 1.11847 before easing to settle at 1.1135 in early Sydney trade. Euro area Manufacturing PMI’s were mostly upbeat with Italy and Spain bettering forecasts. Manufacturing PMI’s France and Germany matched expectations.
The latest Commitment of Traders report saw net speculative Euro short bets increase to -EUR 114,021 bets (week ended February 25) from -EUR 91,507 the previous week. Net Euro shorts jumped to a 38-month high and the equivalent of USD 15.5 billion according to Saxo Bank.
Expect consolidation within a new trading range of 1.1080 to 1.1180 with the Euro continuing to drive higher. The short term up move has been swift and powerful. Immediate resistance on the day lies at 1.1160 (NY close) followed by 1.1185 (overnight high). Immediate support can be found at 1.1085 and 1.1050. Short-term, look to trade a likely range between 1.1085 and 1.1185. in the more medium-term, look to buy the shared currency on a move back down to 1.1050.
AUDUSD – The Battler Gets Ready to Rumble
AUDUSD traded higher as risk assets roared back and the US Fed set the tone for a coordinated central bank response to the COVID-19 crisis. This took away the pressure of a widely expected RBA rate cut of 0.25% at the conclusion of their policy meet today. Prior to that, the Aussie was under tremendous pressure as markets sold off risk with the coronavirus spreading far and fast around the globe. Yesterday, China’s Caixin Manufacturing PMI in February slumped to 40.3 against forecasts of 46.1 and January’s 51.1.
The Aussie was knocked down to an overnight and fresh 11-year low at 0.64338 over the weekend. AUD/USD hit an overnight low at 0.64629 against the overall weaker US Dollar following Jerome Powell’s statement that the Fed would “act as appropriate” to support the economy. AUD/USD jumped to an overnight high at 0.65679 before easing to close at 0.6535 in New York.
The latest Commitment of Traders report saw total net speculative AUD short bets increase (week ended Feb 25) to -AUD 43,832 contracts from the previous week’s -AUD 37,477. This will keep the Battler supported on any dips now below 0.65 cents.
An RBA rate cut of 0.25%, as widely expected will see AUD/USD hold 0.65 cents, rallying to immediate resistance at 0.6570. The next resistance level lies at 0.66 cents. A rate cut of 0.5%, highly unlikely would see 0.6465, and then 0.6430 tested. In the more medium term, an overall weaker US Dollar will result in a stronger Aussie. Look to buy dips, but pick your levels well.
There is a risk of no change in rates as well. AUD/USD would rocket to test 0.6600 first, followed by 0.6640. You gotta love this currency. “Let’s get ready to rumble”.
USDJPY – Stabilizing Along with Risk, Still a Sell on Rallies
USDJPY – the Dollar had a decent bounce from overnight and near 4-month lows at 107.365 to 107.92 at the New York close. USD/JPY rallied further in early Asia as Wall Street stocks roared back. Overnight US bond yields were steady with the benchmark 10-year bond yield up one basis point to 1.16%. Japan’s 10-year JGB rate was steady at -0.13% from -0.16% yesterday. With the yield gap narrowing and the COVID-19 threat still very much at the forefront of markets, USD/JPY topside is limited.
The latest COT report for the week ended 25 February saw total net speculative JPY short bets increase to -JPY 56,359 from -JPY 27,221 the previous week. That’s a massive build for one week, and another reason the topside of USDJPY is limited.
Immediate resistance on the day for USDJPY lies at 108.60 (overnight high traded 108.578). The next resistance level lies at 109.00. Immediate support can be found at 107.90 and 107.40. Look for initial consolidation between 107.70 and 108.70. Prefer to sell rallies.
Reporting by Michael Moran. Filed 3 March 2020, 09:58 GMT.
