US dollar bulls couldn't have asked for a better scenario—Just as the USD index (basket of 6 currencies largely weighed vs EUR) was about to test a 3-month trendline support, the currency recovers. And just as EURUSD had broken above its 200-DMA for the first time in 13 months and above its 55-WMA for the first time in 12 months in a matter of 4 days, the single currency crashes back below these key levels later in the same week. But CAD, AUD, NZD and NOK have all outperformed USD thanks to a broad bounce in energy.
Dollar Sweet Spot?So is this it? Is this the pause-for-breath that USD bulls have long demanded for their currency before accumulating further gains into the rest of the year? By Monday evening, expectations for a September Fed hike fell to as low as 20% from as high 57% earlier in the month. Today, odds of a September lift-off bounced back to 30%.
We think that in order for the US dollar to accumulate fresh gains and sustain them, the balance between certainty for a 2015 Fed hike and certainty of no Fed hike must be evenly distributed (such as 45%-55% for Sept). The problem with +60% certainty of September move is that it eliminates the probability for a December hike despite what some FOMC members' forecasts have indicated (2 hikes in 2015).
For obvious reasons, USD bulls do not want Sep Hike odds falling below 20%. Therefore, the sweetest spot as far as Sep Fed hike expectations is for them to range roughly between 35% and 50%.
Conventional & unconventional interventionReaders of my work may not need reminding that I still see no Fed hike in 2015 and any such action would be a policy error, which will trigger more “artificial” interventions from the Chinese, as well as the US authorities (but deemed more conventional) such as “circuit breakers” and “Rule 48”. In fact, China is intervening to the benefit of the global economy by selling US treasuries in order to slow the pace of CNY depreciation, which has devastating effects on the global markets and economy, if allowed to move rapidly.
Premium subscribers who have questioned our recurring USD shorts vs EUR and GBP since June have obtained their answer this week and the last as our $1.15 and $1.17 targets in EURUSD have both been hit.
Now comes the hard part. Trading the retracement.
The US dollar showed its currently less concerned with what the Fed will do in September and more preoccupied with the risk trade as it snapped higher. The loonie kept pace with USD as the top performer while European currencies were beaten up badly. The BOJ's Kuroda speaks later. The chart below highlights the potential similarities between the latest weekly chart in S&P500 and that in mid Oct-2014. 2 new trades have been issued on the Dax for Premium subscribers.
A volatile market is ever-dangerous and even dovish comments from the Fed's Dudley couldn't undercut a surge in the US dollar as risk assets ripped higher. The S&P 500 posted its biggest one-day rally since 2011.
Dudley said a Sept rate hike seems less compelling to me than it was a few weeks ago but sentiment is much more important than statements at the moment. An ebb in the fear that's gripped markets led to spectacular rally in the US dollar.
EUR/USD and cable both fell more than 200 pips. Late in the day the euro fell below the 200-day moving average while the pound took out the 100-dma.
Nerves were also soothed by economic data. July US core durable goods orders rose 2.2% compared to +0.3% along with upbeat revisions.
We interpret the surge in volatility (rising & falling markets) to be a message to the Fed and PBOC that the global economy is on shaky footing. If stocks can continue to rally and the US dollar stabilizes, that could be the end of this episode for now but if central bankers push a hawkish agenda it will surely reignite.
In the short term, we remain extremely cautious. The Canadian dollar remains overwhelmingly vulnerable as oil prices failed to rally on a large US supply drawdown. A large Canadian bank also called for a BOC rate cut on Sept 9.
The next central bank in focus is the BOJ with Kuroda in NYC to speak about Japan's inflation target at 2300 GMT. The topic hints at potential fireworks but it would be difficult for the BOJ to signal more QE so soon. The previous round of QE was also a surprise and that proved to be effective in weakening the yen so he could remain mum.
|Durables Ex Transportation (JUL)|
|0.6%||0.3%||1.0%||Aug 26 12:30|
|Durable Goods Orders (JUL)|
|2.0%||-0.4%||4.3%||Aug 26 12:30|
We look at the consequences of the crushing turnaround in stocks and what currencies are most vulnerable. The US dollar was the top performer Tuesday but its gains were slashed late in the day. The focus will be on Asian stocks in the hour ahead but the RBA's Stevens is also on the docket. in Ashraf's Premium Insights, 4 trades hit their final targets over the last 36 hrs; - EURUSD (opened Friday), USDCAD (opened Jul 15), USDJPY (opened Aug 20) & CADJPY (opened Jul 8) for a total of 720 pips. 1 trade remains in progress, currently +120 pips.
Yesterday we speculated about the Fed staying dovish and the PBOC cutting rates at any moment and the second part of that equation was delivered after a 7.6% drop in the Shanghai Composite. “How markets react to those [central bank] moves will be extremely telling” we wrote.
The tale has now been told. The 80 point intraday reversal in the S&P 500 is the largest since 2008 and the market closed on the lows.
Ultimately, what we do is listen to the market and the message is loud and clear. The stock market has lost confidence in central bankers and the global economy. The data is secondary at this point because it's backwards looking. The Richmond Fed provided more evidence that US manufacturing is taking a hit from the dollar while consumer confidence was upbeat and housing remains solid.
Aside from Wednesday's US durables goods release, the main theme now is continued US dollar vulnerability on expectations that the Fed will take rate hikes off the table. The first hint might come in US trading with Dudley to deliver a speech at 10:00 ET, 15:00 BST. BoJ's Kuroda follows 9 hours later.
Another trade that stood out was USD/CAD rising to an 11-year high despite a bounce in oil prices. The Fed and PBOC are in focus but the chance of a BOC cut in October and QE down the line is rising exponentially. That the pair could rally 200 pips from the lows on Tuesday even with oil prices higher is a clear sign of CAD weakness.
Up next we get to see if the PBOC action can stabilize Chinese stocks. The cut in rates, the stamp tax and the RRR was about the best markets could have hoped for. It will take a monumental effort to turn around Shanghai stocks and we now doubt this will be enough.
The other main item on the agenda is a speech from Stevens at 0005 GMT. He must surely be listening to the signals from China and any hints or fears about global growth will be met with Australian dollar selling.
|Fed's William Dudley speech|
|Aug 26 14:00|
|RBA's Governor Glenn Stevens Speech|
|Aug 26 0:05|
|CB Consumer Confidence (AUG)|
|101.5||93.4||90.9||Aug 25 14:00|
|Richmond Fed Manufacturing Index (AUG)|
|0||10||13||Aug 25 14:00|