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Nicolas
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Based on Monday’s price action and the close at 97.235, the direction of the March U.S. Dollar Index on Tuesday is likely to be determined by trader reaction to the 50% level at 97.170.

The U.S. Dollar closed lower against a basket of currencies on Monday after an early session rally failed to attract enough buyers to extend the move much beyond last week’s high.

The Euro finished higher against the greenback, contributing the most to the index’s loss. The dollar also lost ground to the Canadian Dollar and the safe-haven Japanese Yen and Swiss Franc. Another sharp break in the British Pound helped offset some of the weakness.

On Monday, the March U.S. Dollar Index settled at 97.235, down 0.039 or -0.04%.

The Canadian Dollar shook off early weakness against the greenback to post a modest gain. Canada’s economy unexpectedly shrank by 0.1% in October, the first monthly decline since February, partly because of a U.S. auto strike that hit manufacturing, Statistics Canada data indicated on Monday.

The Sterling fell to a three-week low against the dollar, pulled down in holiday-thinned trade by nagging concern over the British government’s hard line on Brexit talks.

Over the short-run, the U.S. Dollar has been supported since Washington and Beijing came to an interim trade agreement earlier this month. The future path of the dollar, however, will likely be determined by what kind of benefits non-U.S. currencies reap from the easing of tensions between the United States and China.

The main trend is down according to the daily swing chart. A trade through 98.045 will change the main trend to up. A move through 96.295 will signal a resumption of the downtrend.

On Monday, the dollar index formed a closing price reversal top. This may be an indication that the short-term counter-trend rally is completed. A trade through 97.405 will negate the closing price reversal top, while a trade through 97.170 will confirm the potentially bearish chart pattern.

The main range is 94.665 to 98.735. Its retracement zone at 96.700 to 96.220 is major support.

The short-term range is 98.045 to 96.295. Its retracement zone at 97.170 to 97.380 is resistance. This zone stopped the selling on Monday.

The new minor range is 96.295 to 97.405. If the closing price reversal top is confirmed then its 50% level at 96.850 will become the next downside target.

Daily Swing Chart Technical Forecast

Based on Monday’s price action and the close at 97.235, the direction of the March U.S. Dollar Index on Tuesday is likely to be determined by trader reaction to the 50% level at 97.170.

Bearish Scenario

A trade through 97.170 will indicate the presence of sellers. If this generates enough downside momentum then look for the selling to possibly extend into the minor 50% level at 96.850.

Bullish Scenario

A sustained move over 97.170 will signal the presence of buyers. The first upside target is 97.380, followed closely by 97.405. Taking out 97.405 could trigger an acceleration to the upside.

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fxguy
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US Dollar Faces Bearish Fundamental Headwinds from the Fed & Trade

By Rich Dvorak

US DOLLAR FORECAST – USD PRICES COULD FALL ON SUSTAINED FED BALANCE SHEET GROWTH & LINGERING RISK APPETITE FROM THE SIGNED PHASE ONE TRADE DEAL

  • The US Dollar continues to rebound into the new decade with the DXY Index climbing nearly 1.5% higher year-to-date, but USD prices still trade roughly 2.0% below the October 2019 peak
  • Fundamental outlook for the US Dollar remains unfavorable considering the Fed plans to keep inflating its balance sheet while markets grow frothy in light of an absence of volatility
  • Diminishing US Dollar safe-haven demand could endure amid receding recession probabilities and recovering global GDP growth outlook owing to the newly signed US-China trade deal

USD price action just recorded back-to-back weekly gains according to performance recorded by the US Dollar Index (DXY). The US Dollar has churned about 1.5% higher so far this year, which follows the Greenback’s 3.5% drift lower from October 03 to December 31 that marked a 5-month low.

Future potential upside in the US Dollar could be limited, however, with USD price outlook lacking bullish conviction in light of dissipating fundamental catalysts that have previously helped propel the US Dollar higher.

A pertinent theme likely contributing to the US Dollar’s dominance last year was demand for safe-haven currencies, though this has faded over the last few months alongside perceived recession risk. 

DXY PRICE CHART – US DOLLAR INDEX & VIX INDEX OVERLAY: DAILY TIME FRAME (APRIL 2019 TO JANUARY 2020)

DXY Index Price Chart US Dollar Forecast Currency Volatility

The unwinding of priced recession probabilities and corresponding retracement in market uncertainty – or volatility – likely explains ebbing USD demand and the string of weakness recorded by the US Dollar throughout 4Q-2019.

This has been driven primarily by the down-throttled trade war between the United States and China, which just produced tangible fruit in the form of a phase one trade deal signed last week by US President Trump and Chinese Vice Premier Liu He.

Measures of volatility have, in turn, edged lower amid increasingly upbeat market sentiment. In fact, currency volatility has slumped back to historic lows as gauged by the JPMorgan Global FX Volatility Index. That said, the USD could soon come under pressure relative to other major currency pairs once more with risk appetite bulging and volatility remaining suppressed.

FED BALANCE SHEET CHART – FEDERAL RESERVE TOTAL ASSETS: WEEKLY TIME FRAME (JANUARY 2012 TO JANUARY 2020)

Chart of Federal Reserve Balance Sheet Total Assets Held by the Fed

Another fundamental force that frequently strongarms the direction of the US Dollar is the Federal Reserve. In addition to slashing interest rates by 75-basis points last year, the Fed resumed growth of its balance sheet – albeit ‘organically’ and is ‘not to be confused with QE’ according to Chair Jerome Powell.

The Federal Reserve has steadily expanded its balance sheet since September 2019 and the central bank just announced last week that it intends to keep its printing press greased up for at least another month. Specifically, the New York Fed district bank confirmed it will extend its overnight repo and term repo operations until February 13.

The FOMC has already injected a staggering $415 billion of liquidity (i.e. supply of USD) into the financial system since US Dollar funding pressure sparked Fed action last year. That said, the Fed will maintain its daily cap on overnight repo operations at $120B and offer up to $30 billion on its term repo offerings but will keep the current cap of $35 billion through month-end.

FOMC INTEREST RATE CHANGE ODDS CHART – FED FUTURES IMPLIED PROBABILITY CURVE (DECEMBER 2019 TO JANUARY 2021)

US Dollar Forecast Chart of Fed Interest Rate Change Probability

While on the topic of the FOMC, the futures-implied probability of an interest rate change at the central bank’s January 29 meeting has experienced a notable reversal from a dovish to hawkish tilt since the December Fed meeting.

Overnight swaps pricing for the January 29 FOMC interest rate decision has flipped from a relatively lower implied FFR of 1.553% on December 12 to a relatively higher implied FFR of 1.583%, but it is most likely that FOMC officials leave Fed monetary policy unchanged.

As for fundamental economic data, USD bulls were quick to overlook discouraging wage growth figures and a worse-than-expected reading on the latest headline CPI reading when strong housing starts data crossed the wires. Housing starts soared nearly 17% in December to a 13-year high and is an encouraging sign for the sustainability of the longest US economic expansion in history.

While that datapoint is definitely a positive for the American economy, the enthusiastic response in the US Dollar seemed a tad overdone considering the latter two economic indicators likely hold greater credence with regard to their relative impact on monetary policy decisions from the Federal Reserve.

In light of a sparse economic calendar for the week ahead, forex traders may direct their attention toward the 2020 World Economic Forum annual meeting with keynote speeches from Donald Trump, Angela Merkel and Christine Lagarde on the docket alongside many other global leaders.

 
On that note, US President Trump will likely tout his freshly inked trade deal with China, which could provide another positive jolt to risk appetite – often a bearish USD headwind.

Additionally, head of the European Central Bank – Christine Lagarde – is expected to detail the ECB monetary policy strategy review on January 23, which could send spot EUR/USD and the broader US Dollar Index swinging in response to any shocking announcements.

 

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FxPro
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Big Mac Index shows USD is overvalued. Get ready for decline!

However, these local stories may not be interesting for global investors, they will only look at the dollar positions. By the beginning of 2020, only the above two currencies were overvalued against the dollar, while ten years ago there were 15 such currencies, and 14 before the Global Financial crisis (estimated as of June 2008).

What does it mean for the dollar for now? Absolutely nothing. History shows that while currencies tend to compensate for their under/overpricing, this path takes years and can be abruptly interrupted at any moment by sudden economic shocks.

If we look at a longer perspective, it turns out that Trump is right about the excessively high dollar rate. Perhaps, Trump is also correct, blaming it the Fed’s tight policy, as USD has moved up sharply due to signals of tightening monetary policy in 2014.

This growth had stopped by Trump’s tax reform in 2017, and the global growth became synchronous and accelerated for several quarters. This weakening of the dollar was also arrested by Trump, who decided to revise trade agreements one after another.

The history of the index is not very extensive, so it isn’t easy to make unequivocal forecasts based on these data. However, it follows from these data that the dollar has noticeably broken away from major currencies. This theory suggests that this or next year the dollar may be under pressure, starting to compensate some overvalue. We observed A similar pattern after 2001 when only three currencies were overvalued against the dollar. And this trend developed up to the middle of 2008 when the dollar started to grow actively in response to the increased demand for protective assets.

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FxPro
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Dollar growth possible targets and timing

The dollar index closed last week above 99.0, in the three-years peaks area. After touching these levels in September-October last year, the US currency reversed downwards for several times. But this time we will likely see further strengthening of the dollar’s index in the 100-103 area, which will mean a return to the peak levels of 2016-2017. Back then, the dollar index was in the 13-year highs for a little longer than a quarter but soon began to decline.

There is a similar story with the most popular FX pair – EURUSD. After a decline of below 1.0880, it returned to April 2017 levels. From the current levels, the next major downside milestones are 1.0730, 1.0500, 1.0340.

The first mark will close the gap in the pair formed after news on France elections when risks of ultra-right Marine Le Pen coming to power has disappeared. The second mark represents the last round psychological level before the euro and dollar parity. The third is the lower point of the pair in January 2017, when the euro was sliding down on low volumes in the first days of the year.

A decline below 1.0340 will potentially return the pair to 2002 levels. These were the times when the ECB supported EURUSD in the first years of the life of the single currency. At that time, the level of confidence around euro-project was low.

From the fundamental point of view, there are no particular obstacles to the decline of the single currency now. In the 4Q19 the eurozone economy slowed to 0.9% YoY, compared to 2.3% for the US. A long list of comparisons of data not in favour of the eurozone includes inflation, employment growth rates, the scale of the slowdown in industrial production, growth rates in the services.

A wide range of data suggests that the ECB needs a massive policy easing to make it consistent with Fed policies. All these arguments are in favour of the further growth of the dollar. But there is also an argument against it: Trump.

The US president repeatedly and publicly spoke in favour of monetary policy easing, intended to weaken the dollar and through this to support exports. According to the available comments, the exchange rate issue was actively discussed in the US and China trade negotiations, and now it may become one of the crucial cornerstones in the US and EU negotiations, which Trump has outlined for this year.

There have been precedents in US history when the whole world was forced to support or at least not to prevent the weakening of the dollar. There were interventions by European central banks in the early 2000s and the Plaza Accord in the 1980s, not to mention the abandonment of the gold standard in the early 1970s, which also triggered the weakening of the dollar.

History suggests, however, that the dollar weakening has been benefiting the world economy, whose growth rates increased in response to the markets’ desire to put dollars into work, rather than storing them in Treasury Bills. So the US administration may have arguments to convince Europe and the rest of the world to stop the dollar’s appreciation when it seems excessive.

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craig
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Market Overview

There is an almost daily swing on market sentiment as traders grapple with the bigger picture implications of COVID-19. The dissemination of newsflow out of China is looking to be more positive. Although the total number of deaths has topped 2000, the numbers of daily new cases and deaths are now falling. Furthermore, the official information is that Chinese businesses are getting back to work following weeks of shutdown and quarantine. Traders are faced with a dilemma of whether they can rely on the official data. Levels of pollution and electricity usage have been often used as more reliable gauges in the past and will need to be watched as to whether they marry up with the official data. It does seem as though knee-jerk reactions to bad news (Apple’s revenue warning being the latest) tend to last for a day or so before traders refocus on the dovish leanings of central banks and a continued tendency to “climb the wall of worry”. For markets, there is a more settled outlook to sentiment forming today. Through all of this, the dollar remains a go-to destination of capital choice, whilst gold is also playing strongly. What is interesting though, is that sentiment on the oil markets has turned a corner, with an appetite to buy into weakness now increasingly prevalent.

Wall Street closed lower last night with the S&P 500 -0.3% at 3370. However, with US futures looking perky today, around +0.3% back higher, this is allowing a decent Asian session (Nikkei +0.9%, Shanghai Composite -0.3%). European markets are taking this positively, with FTSE futures +0.7% and DAX futures +0.6% pointing to decent early gains today. In forex, there is a positive risk skew to majors, with JPY underperforming and a rebound for AUD and NZD. Once more we see EUR supported early in the European session, but can the cycle of sell-offs be broken and be translated into a recovery?  In commodities, gold continues to climb higher by +$3 (+0.2%), whilst oil is also supported and is over half a percent higher.

The key data on the economic calendar kicks off with UK CPI at 0930GMT. Headline UK CPI is expected to fall by -0.4% in January but this would still mean a year on year improvement to +1.6% (from +1.3% in December). Core UK CPI is expected to drop by -0.6% on the month but the year on year reading is expected to increase slightly to +1.5% (from +1.4% in December).  Into the afternoon, the focus is on inflation for the US, but this time it is the PPI, or factory gate inflation. US PPI is at 1330GMT and is expected to see headline PPI increase to +1.6% in January (from +1.3% in December), whilst core PPI is expected to pick up to +1.3% (from +1.1% in December). US Building Permits at 1330GMT are expected to increase slightly to 1.450m (from +1.420m in December). US Housing Starts are expected to fall to 1.425m (from 1.608m in December). The FOMC minutes for the January meeting are at 1900GMT where the focus will be on what the Fed had to say about the impact of the Coronavirus and inflation.

There are also a couple of Fed speakers to watch out for today. Neel Kashkari (voter, big dove) speaks at 1445GMT whilst Robert Kaplan (voter, centrist) speaks at 1830GMT.

 

 
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Nicolas
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FOMC has almost no tools left to stimulate growth in the event of a stock market crash

The Ugly Truth About This Fed Rate Cut’s Impact on the Stock Market

To put Tuesday morning’s incredible FOMC decision into context, this is the first action of this kind since the financial crisis in 2008. The difference is that back then, the bank was responding to a structural failure in the system at large. Stock markets around the world were crashing because of toxic debt. This time, the coronavirus impact is very different.

A lower interest rate won’t get people traveling again, or mend any broken Chinese supply lines. Only a slowing in the spread of COVID-19 can do that. Senior Economist Sebastian Galy at Nordea Asset Management provided the following take to CCN.com on the limitations of the Federal Reserve’s rate cut decision:

Central banks are by nature stabilizers in the system, and the Fed is showing the way and will be followed by others though as we have pointed out (and Blanchard) monetary policy can only do so many things. The subdued reaction of the equity market suggests a typical buy the rumor and sell the fact, and we continue to anticipate two weeks of high volatility in the markets in what is a liquidity event and only belatedly a credit one.

That fact has not stopped Donald Trump from relentlessly bashing Jerome Powell as he continues to do his best to reassure Wall Street. What is overwhelmingly clear is that the G7 teleconference call must have outlined to the Federal Reserve just how bad the epidemic situation is around the world. The Reserve Bank of Australia cut interest rates on Tuesday morning citing major concerns about the coronavirus, and now the Fed has gone even further.

The FOMC is resolute in its mandate that it does not react to moves in the stock market. Instead, the U.S. central bank claims to be “data-driven.” If we trust that Powell has preserved the Fed’s independence, the only explanation is that a terrible economic reckoning is coming. Not only did the Federal Reserve provide a rate cut, but also a massive amount of liquidity through a $120 billion repo market injection.

These are undeniably crisis-level measures from Powell. Despite this, Donald Trump still piled in on Jerome Powell, urging him to cut interest rates even more. With these attacks, the president reveals how deeply concerned he is about last week’s stock market crash affecting his re-election bid. Unfortunately for Trump, he got his rate cut – but only because the FOMC finally acknowledged just how devastating the economic impact of the coronavirus could be. With crisis-level stimulus and the stock market still under pressure, Powell may have just fired his last bullet.

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TimsTrading
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USD is the worstperforming currency at the moment

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caballero
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U.S. employment report expected to show strength before coronavirus spread

Though the Labor Department’s closely watched monthly employment report on Friday will not fully capture the impact of the coronavirus, which spread in the United States beginning in late February, there are so far no signs that the epidemic has hurt the labor market. Layoffs remain low and small businesses and services sector industries continue to hire at a solid clip.

The Fed on Tuesday slashed its benchmark overnight interest rate by a half percentage point to a target range of 1.00% to 1.25%, in the U.S. central bank’s first emergency rate cut since 2008 at the height of the financial crisis. Fed Chair Jerome Powell acknowledged the economy’s strong fundamentals, but said “the coronavirus poses evolving risks to economic activity.”

According to a Reuters poll of economists, the government’s survey of establishments will probably show nonfarm payrolls increased by 175,000 jobs in February. While that would be a step-down from the 225,000 jobs added in January, the anticipated gains would match the monthly average employment growth in 2019.

Economists believe employers are most likely to cut hours for workers initially and proceed to layoffs if the epidemic persists beyond the second half of this year and into 2021. So far, weekly applications for unemployment benefits, the most timely labor market indicator, were trending low in early March.

Labor market strength is likely to be reinforced by steady wage growth. Average hourly earnings are forecast rising 0.3% in February after gaining 0.2% in January. The annual increase in wages will, however, slip to 3.0% in February from 3.1% in January as last year’s large gain falls out of the calculation.

The jobless rate is expected to have held steady at 3.6% in February. It increased one-tenth of a percentage point in January as more people joined the labor force, in a sign of confidence in the job market.

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caballero
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Fed is going to cut rates again, perhaps even in two weeks: Jeffrey Gundlach

Meanwhile, the yield on the benchmark 10-year Treasury continued to head lower after breaching below 0.9%. It last traded at 0.8097%. Treasury yields saw sharp declines this week, continuing to touch new record lows after the Federal Reserve announced an unexpected 50 basis points cut from its benchmark interest rate. It was the central bank’s first such emergency move since the financial crisis more than a decade ago.

“Bond King” and DoubleLine Capital CEO Jeffrey Gundlach told CNBC on Thursday that he believes the Fed panicked in cutting rates earlier this week. “If we look at history, once the Fed does a panic, intermeeting rate cut, particularly when it’s 50 basis points … they typically cut pretty quickly again,” Gundlach said. “I’m in the camp that the Fed is going to cut rates again, perhaps even in two weeks” during its regularly scheduled meeting. The moves came amid a wild trading week on Wall Street which has seen stocks make big moves in both directions. The 30-stock Dow swung 1,000 points or higher twice within three days earlier this week.

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Nicolas
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The US dollar will test 105 against a basket of currencies in the short term, analyst says

Given the scarcity of dollars, the U.S. Federal Reserve last week announced that it set up financing channels with nine other central banks, including the Reserve Bank of Australia and Monetary Authority of Singapore, to stabilize currency markets.

That opened access to $450 billion of additional dollar funds, with a commitment to keep the arrangement in place for at least six months. However, analysts aren’t sure if that amount will be enough to contain the fear among investors who are hoarding dollars as market gains evaporate. Khoon Goh, head of research at Melbourne-based ANZ Bank, thinks the greenback will rise to 105 on the dollar index in the short term. As of Tuesday it stands near 102, and last was at 105 in late 2002.

The Fed announced open-ended additional stimulus on Monday, and Goh acknowledged that some steam came off the dollar rally. The dollar spike isn’t surprising given extreme market volatility and investor fears that go along with it. But a number of aspects to the rise are worrying some analysts:

Bad news for emerging market assets – With many currencies like the Brazilian real, Indian rupee and Indonesian rupiah plunging to record lows, the next move to watch for is a G20 level currency intervention. With the Fed funds rate in the U.S. down to near zero and most emerging market central banks cutting rates aggressively, the yield advantage for those countries’ currencies has withered away.
Negative for US exports – At a time when President Donald Trump has repeatedly said he doesn’t like a strong dollar, the rally will be detrimental for U.S. exports, especially once the pandemic curve flattens and consumer and industrial demand bounce back.

Top reserve currency of the world – According to the IMF, more than 61% of all foreign bank reserves are in U.S. dollars. Plus, nearly 40% of the world’s debt is in dollars. Together with the euro, the two currencies dominate 80% of global reserves. The Chinese renminbi, despite the country being an integral part of global trade, makes up less than 2% of global currency reserves. That creates over-dependence on the U.S. greenback.

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Nicolas
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Dollar’s Best Streak Since 2012 Is Over, Showing Stress Easing

The Bloomberg Dollar Spot Index declined 0.6%, ending a 10-day rally that took it to the strongest level on record after the Federal Reserve announced unprecedented stimulus. The index earlier fell as much as 1.5%, the most since 2016 on a closing basis. Treasuries fell and stocks around the world surged on signs U.S. leaders are close to reaching a consensus on a spending bill to boost the economy.

Norway’s krone led gains against the greenback, jumping the most on record before paring. Australia’s dollar extended a rebound from a multi-year trough and the pound rose as much as 2.2%, even after the U.K. entered a full lockdown to contain the coronavirus. An index of emerging-market currencies was on course for its biggest advance in more than three years, a positive development for borrowers with debt in the U.S. currency.

The relief sweeping over markets is in stark contrast to last week when investors sold almost everything but the dollar amid the growing fallout from the virus. A slew of emergency measures from major central banks including Japan and Australia failed to calm markets, with the worries centered on a liquidity crunch.

Those pressures now seem to be moderating. In the latest move on Monday, the Fed said it would buy an unlimited amount of government bonds to keep borrowing costs low and expand its Money Market Mutual Fund Liquidity Facility. It had earlier extended its dollar-liquidity swaps to other policy makers including those in Australia and Brazil.

Meanwhile, the spread between more liquid current bonds, known as “on-the-runs” and older so-called off-the-run securities has tightened. Still, strains in funding markets remain, and options traders aren’t convinced that the dollar’s retreat will mark a complete turnaround in sentiment. The premium to go long the dollar over the next month versus its major peers still trades near its highest in eight years.

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