USD trading softer

USD

The US index has pared recent gains to now sit on levels not seen since two weeks ago. Some softer than expected data, but more importantly cautious Fed comments have taken the wind out of the USD surge seen since mid-September, where the global currency gained just over 4%

Comments from Fed members Clarida and Kaplan last week pointed out weaknesses in the global economy, which has cast doubts on the scale of the Fed’s monetary policy tightening path. This week, rhetoric from Fed’s Williams underlined that the FOMC is not on a pre-set course of monetary policy tightening. He also noted that the Federal reserve is likely to raise interest rates, but only in the context of a very strong economy.  These comments have led investors to question if the USD recent rally is drawing to a close. Already last week some gains in the currency have been erased, with the index now sitting on short term support levels, momentum now favour lower prices for now.

The market still discounts a high 75% probability that the FOMC will raise rates again next month, so weaker data may lead to a fall in short term interest rates and a lower dollar.

Currencies that have benefitted most from the greenback’s weakness have been the EUR and dollar bloc currencies such as AUD, NZD and CAD.

EURUSD has managed to trade off recent lows, having been pushed lower on Brexit concerns and poor data. The common currency itself is impaired by recent evidence that that the EZ economy is slowing. The markets will watch closely PMI data for confirmation of this. Note ECB’s Draghi was mildly cautious last week. In the current context we prefer to buy dips this week in the EUR targeting 1.1430 and 1.1400 for an eventual test of 1.1510.

The NZD and AUD have both traded off the Oct lows, the AUD especially aided by a break higher through the 0.7150 resistance area. The RBA has been mildly upbeat, however, noting that the central bank are in no rush to move on monetary policy any time soon. The minutes of the last RBA’s MP meeting showed that policy makers expect above trend growth this year, and a further easing in unemployment to 4.7% for next year. The AUD is often traded as a bell weather  for global growth therefore the ongoing US/SIno trade tensions may cause a drag on the currency’s potential. We are bullish for the AUD and recommend buying dips to 0.7240/7210.