Dollar fatigue sets in

Dollar fatigue sets in

The USD rally has derailed with dollar backpedalling overnight. Perhaps attributable to trader fatigue after this week’s frenzied paced sell-off on US bond markets or even a bout of nervous nellie profit-taking. However, the dollar pull-back is more likely a reaction to the fact the hugely anticipated tax reform broadcast has come and gone and the reality check sets in that the road to reform will be a long and winding trek and an extremely bumpy one at that based on the current GOP squabbling.
All eyes will remain on US treasuries for the foreseeable future as this week’s ferocious action is unlikely to yield anytime soon given the shifting market narratives.( hawkish fed, tax reform) .However, with market exhaustion setting in, the constant bond curve activity is abating as we enter weeks end and predictably profit taking is setting in.


Although the EUR has fallen on the back of higher US yields this week, the move has remained tidy as there appears to be a reluctance to sell the EURUSD below 1.1700 as traders believe the long-term investors will eventually have the upper hand and remain buyers in EURUSD dips.

Given the hullabaloo this week over the hawkish shift in the Fed and USD positivity surrounding tax reform, we may be looking at a stronger dollar narrative heading into year-end. However, the EUR needs a distinctive look as the ECB remains the real wild card in the deck. It is possible the more aggressive FED policy tact allows the ECB more wiggle room. So it is conceivable the ECB will sidestep the inflation conundrum, as did the Fed’s, and will start to normalise policy soon.This allure should be enough to keep interest in the long EURO trade as dealers will be more than eager to catch the ECB policy shift momentum.

Japanese Yen

Battle lines are developing between election concerns and US yields, but month-end flows may also be distorting the picture. It is hard not to remain supportive of the long USDJPY trade, but the market will get the jitters the tighter the election polls run.

Australian Dollar

USD profit taking ahead of .7800 level ( this was an active short-term target for the AUD bears) has seen the AUDUSD recover off the overnight lows, but the reasons to sell the AUD remain in place.

Iron ore prices look precarious perched as the decline in prices is surely on the cards if the full brunt of Beijing-mandated steel production restriction comes to fruition.

Also, it is evident the RBA would welcome further currency weakness and its careful approach to tightening policy is arguably second only to the  BOJ on the dovish scale at this stage.

Its even being bandied around market circles that Aussie may end up being a funding currency as other global central banks gallop towards policy normalisation.

Look for the Aussie sellers to emerge on rallies.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes