Dollar bears got too far over their skis

Dollar bears got too far over their skis

The USD dollar has a spring in its step to start the week. But with little to no evidence that the broader US dollar downtrend has run its course, the short-term correction is little more than the recent buildup on EURUSD longs has left dollar bears too far over their skis and vulnerable to a position squeeze given the lack of near-term bullish Euro catalysts.

With no imminent threat from a more aggressive policy shift from US Federal Reserve. Most traders will feel comfortable selling USD dollar rallies but are likely waiting for a more pronounced correction or a stronger signal to re-engage dollar shorts. In the meantime, they’re equally content to take to the sidelines keeping the powder dry but most of all avoiding any early year losses. There is nothing worse than digging oneself out of a hole at the beginning of the year so best to have your ducks in a row before testing the waters.
Oil prices

Protest in Iran, and decreasing US crude inventories are providing a stable floor on WTI. And while the frigid temperatures in the US North East are pressuring heating oil, travel chaos sparked by heavy snows is keeping driver off the roads adding to higher inventories of gasoline which could temper price action. And while speculative positioning is stretched in record territory increasing the potential for a position squeeze, there’s no arguing the trend is your friend in this move. And with geopolitical risk extending from Tehran to Venezuela’s  economic demise, the market remains on a bullish tack.

Gold prices edged a bit lower overnight after the US dollar took back some lost ground from the EUR.But as the USD mini-correction ran out of steam, gold prices quickly retraced earlier loses. Given the very tight current correlation between Gold and USD coupled with relatively sparse news flow, bullion dealers will be keying on Fed speak to provide a catalyst for the dollar ahead of Friday key US CPI, but so far the Fed rhetoric as contributed few sparks.
Equity Markets

With absolutely no threat from the US Federal Reserve who is guiding the market to a well-telegraphed three rate hikes this year and the ECB ambling into an equally well-telegraphed temperate monetary policy for 2018, equity investors continue to enjoy the relative calm exuded by centeral banks.

And with earning season brings renewed optimism, but in the absence of any significant news flow overnight investors sat idle, but none the less the S&P managed to eke out a small gain despite US 10-year Treasury yield sticky around the 2.48% level.


The Euro

The latest IMM data suggests speculators increased their largest EUR long position since October 2013. And with the Euro falling to take out 2017 highs after the weaker NFP there been a bit of a clear out of weaker longs this week. But market positioning is still substantial, and the dollar bears are playing more of a tactical game early in the week and not showing a competitive bias to accumulate EURO. Also, the Euro rate curve is taking a pause this week after the EONIA curve steepened last week when the market started repricing ECB risk more aggressively.

The Japanese Yen

There’s a disconnect between USDJPY and broader US dollar trend that’s  likely a result of EURJPY steering the JPY ship these days. And with the Euro in consolidation mode, it looks like we’re stuck in the range bound malaise.

Looking for a medium-term trade on USDJPY is like sitting on a razor’s edge. We know JPY could weaken given the favourable global risk conditions and rising global yields. But the vast unknown remains the hawkish tail risks to the speed of the BoJ’s “stealth taper”, which in turn could accelerate repatriation into Japan.

Australian Dollar

The broader commodity space continues to look medium term bullish especially oil and hard commodities on the back of the stronger global growth narrative. This period of consolidation should not be confused with anything other than just that. However, commodity block traders are pilling their risk into the Canadain Dollar in the wake of last week stupendous employment data and a probable Bank of Canada rate hike later this month.The speculative rotation is taking a bit of focus away from the Antipodeans early this week.

The Chinese Yaun

Despite the mini-dollar correction yesterday the overtones from the mainland suggest regulators are determined to accelerate Yuan exchange rate reform after a two-year hiatus. Given the probable inclusion of CGB’s in Global Bond Indexes later in 2018, the Yuan is likely to keep strengthening through the first part of the year.

Asia FX

While  there’s tangible evidence that trends tend to reverse in January on their volition, however unofficial jawboning from an unnamed Korean official was enough to upset the $ Asia apple cart yesterday

The Korean Won

After breaking the critical USDKRW 1060 level driven exporter and foreign fast money flow, vague rumours of intervention chatter started to circulate sending the quick money types into a tizzy posting the USDKRW 1% higher. If recent history tells us anything about verbal intervention is that it’s entirely ineffective in reversing or slowing down domestic currency appreciation

None the less,  it spooked the $Asia complex on the assumption that other regional central banks will be just as vigilant against currency appreciation, when in fact nothing could be further from the truth.

With diplomacy between North Korea and South Korea on tap today, the easing of regional tensions could play favourably into the Won and regional currency sentiment today.

The Malaysia Ringgit

The Ringgit held its ground overnight as unlike the BOK the BNM has indicated that they welcome a stronger currency to fend off inflationary pressure . Mind you the Ringgit remains relatively undervalued on a trade-weighted basis.

However, the broader picture remains favourable for further Ringgit appreciation in the lead up to the BNM policy decision later in the month especially in the backdrop of a soft dollar trend and surging Oil prices.

The Philippines Peso

The Philippines Peso suffered a LIFO event after most of the regional currency sentiment wilted on the intervention chatter. The PHP was in the process of playing catch up to region peers ( Last In) but took the biggest hit ( First Out) on the regional currency wobble.

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