Yields Slump, Dollar Slips on Weak US Data, Fed Meet Eyed

Summary: The Dollar reversed, slipping against its rivals, weighed by a slump in bond yields. US economic data released on Friday mostly underwhelmed. The Dollar Index (USD/DXY), a measure of the Greenback’s value relative to a basket of currencies, weakened 0.24% to 96.50 (96.78). US bond yields slumped, the benchmark 10-year finished at 2.59% from 2.63%. This is the lowest since January 3 this year. EUR/USD rallied 0.15% to 1.1325 (1.1305) in quiet trade. The Australian Dollar rose to 0.7085 (0.7067 Friday). The Kiwi was unchanged (0.6847) despite the horrific Christchurch mosque massacre.

Trading View - 3M USD 10-Year Bond Yield - 18 March 2019
Trading View – 3M USD 10-Year Bond Yield – 18 March 2019

The Bank of Japan kept its monetary policy unchanged, as expected. USD/JPY slipped 0.25% to 111.50 (111.72). Japan’s ten-year JGB yield was unchanged at -0.05%. Emerging Market Currencies, Thai Baht, South African Rand, Russian Rouble) all made gains against the US Dollar. Sterling closed higher at 1.3290 (1.3240) against the weaker US Dollar. The British currency ended its most volatile week after UK lawmakers voted to seek a delay, averting a no-deal Brexit.
Industrial Production, Capacity Utilisation, and the Empire State Manufacturing Index in the US all missed forecasts. US Preliminary University of Michigan Consumer Sentiment bettered expectations. Stocks rallied with bond prices. The DOW ended 0.6% higher at 25,865. (25,725).

  • EUR/USD – The Single Currency reversed Friday’s losses, rallying against a generally weaker US Dollar. The Euro traded in a tight 1.1297-1.1344 range, settling at 1.1325. Euro-Zone Final CPI (Q4 2018) was unchanged at 1.5%. The Euro has steadily recovered since the ECB policy meet last Thursday (March 8).
  • GBP/USD The Pound resumed its climb buoyed by rising expectations that the UK will not crash out of the European Union. A generally weaker US Dollar also lifted Sterling. GBP/USD had another choppy session trading between 1.3203 and 1.3300.
  • USD/JPY – The Bank of Japan left its policy unchanged as markets expected. While the Bank of Japan is considered the most dovish of the major central banks, the others have turned more dovish themselves, lifting the Japanese currency. USD/JPY finished 0.25% lower at 111.50 after trading to a low of 11.38.

On the Lookout: The four-basis point fall in the benchmark US 10-year bond yield to 2.59% precedes this week’s Fed monetary policy meeting. This is the lowest close since January 5. All eyes will be on the “patient” Fed. The FOMC will reinforce its view that they will not raise rates for a while. Markets will also be looking at Jerome Powell’s press conference for guidance on the Fed’s balance sheet run-off.
The week ahead begins today with Japan’s Trade Balance, Revised Industrial Production, Eurozone Trade Balance and US NAHB Housing Market Index. Tuesday (19 March) sees the RBA’s February monetary policy meeting minutes, UK Employment and Germany’s ZEW Economic Sentiment Index.
The FOMC has its policy meeting, economic projections, FOMC statement and Press Conference on Wednesday (early Thursday morning Australian time). The UK Parliament will vote to decide on passage of the deal triggering Article 50 with the EU.
Thursday (21 March) sees Australian Employment, the Swiss National Bank’s Libor rate meeting and monetary policy statement. The Bank of England has its rates policy meeting, Official Bank rate votes and monetary policy summary.
Friday finishes off the week with Euro area and US Flash Manufacturing and Services PMI’s. A busy week indeed.

Trading Perspective: The disappointing US Jobs report last Friday was followed by more underwhelming economic data last week. The US 10-year bond yield has slipped back to it’s lowest since early January this year. On Friday, the US Dollar began the day with a rally which was short-lived. Weaker-than-expected US Industrial Production, Capacity Utilisation and Empire State Manufacturing data was not offset by better US JOLTs Job Opening and University of Michigan Consumer Sentiment. The Greenback’s fall was also broad-based. EM currencies ended with strong gains. Without yield support the Dollar will struggle higher. Market positioning is currently long Dollar bets. The Greenback looks set for further losses. “What goes up must come down…”

  1. EUR/USD – The Single Currency has the biggest weight in the Dollar Index (USD/DXY). The Euro slumped to its lowest since June 2017 after the ECB’s dovish meeting on March 8. EUR/USD has steadily recovered since then, closing at 1.1325, up 0.6% from last week. The Euro faces immediate resistance at 1.1340/50. A sustained break higher may see 1.1380-1.1400. Immediate support lies at 1.1300 and 1.1280. Look for a grind higher with a likely range of 1.1310-1.1350 today. The market’s current short positioning favours the Single currency higher.
  2. GBP/USD – Sterling is riding on a confidence wave following the virtual elimination of a NO-Deal Brexit. Last week the Pound traded to 1.3382 before falling to 1.3060 lows. GBP/USD has maintained levels above 1.3200. The overall weaker US Dollar is Sterling positive and a likely test of the 1.3380-1.3400 level is possible. Immediate support lies at 1.3240 and 1.3200. Resistance can be found at 1.3300 and 1.3350. Look for a likely range today of 1.3260-1.3310 first up.
  3. USD/JPYthe Dollar is slip-sliding away against the Yen. After failing to breach 112.00, the Greenback has steadily declined against its Japanese counterpart. The US 10-year yield has dropped from 2.75% (March 4) to 2.59% Friday. USD/JPY was at 111.75 then. USD/JPY will continue its move south with a likely range today of 111.30-111.80. Look to sell rallies.
Barchart.Com USD DXY (Dollar Index) Chart - 18 March 2019
Barchart.Com USD DXY (Dollar Index) Chart – 18 March 2019
  1. USD/DXY (Dollar Index) – The Dollar Index slipped back to 96.50 on Friday following its 96.78 opening. USD/DXY failed to break up through the 96.80/97.00 strong resistance level. Immediate support for today can be found at 96.40 followed by 96.00 and 95.80. January’s low of 95.75 is possible given the slide in US bond yields. Immediate resistance lies at 96.80 and 97.00. Look to sell rallies with a likely trading range of 96.30-96.60 today.

Have a good week ahead, happy trading.