Daily Commentary: Why Is The Dollar Falling?

Why is the dollar falling? There are several reasons. The most immediate reason is probably that the Fed has managed to convince the world that tapering off QE has nothing to do with tightening interest rates. That has caused expectations for US interest rates to fall back sharply. For example, the June 2016 Fed Funds futures were implying a rate of 1.82 on 5 July but have since fallen back to only 1.42%, with similar declines in the Eurodollar futures. Furthermore, many investors seem to fear that the first tapering will be accompanied by some reaffirmation of the dovish outlook.

Secondly, if we look at the balance sheets of the central banks, the Fed is in fact not alone in tapering. The ECB is not just tapering, they are shrinking their balance sheet, which is down 23% since peaking in June of last year. The Bank of England’s balance sheet too is down 2.4% from its peak. Meanwhile, the Fed’s balance sheet keeps growing, and of course what they mean by “tapering” is just that they will slow the pace of expansion of the balance sheet, not shrink it. So it may be that the tapering argument is not such a strong support for USD in the first place as other countries are doing similar. Of course, that doesn’t explain why USD/JPY has fallen back to almost exactly where it was when the Bank of Japan started its quantitative easing even though its balance sheet is already some 20% bigger, vs a 12% expansion in the Fed’s balance sheet over that same time period.

Dollar weakness was again the theme overnight. For some time now USD has been weak vs the G10 currencies but holding up reasonably well vs EM currencies, but following China’s higher-than-expected import figures yesterday, EM currencies rebounded and the dollar fell almost across the board. The dollar does not seem to be responding to good data as sentiment seems to be turning against it. Watch the technicals, not the fundamentals.

During the European day we get French industrial production in June, which is expected to have turned around to +0.3% mom from -0.4% mom. A larger-than-forecast rise higher wouldn’t be too surprising though as Italian, German and UK IP all exceeded expectations. The UK trade figures for June are expected to show a modest improvement overall in the UK’s appalling trade account, with a narrowing in both the visible trade and overall trade deficits. However one searches in vain for any signs of the “rebalancing” way from consumption and towards exports and investment that the Government said it wanted. In Canada, housing starts in July are expected to be a little bit weaker at 191k vs 199.6k in June. The unemployment rate is forecast to stay at 7.1%, but within this, employment is forecast to rise by 10k vs a 0.4k decline in the previous month. These figures could be modestly CAD-supportive.

The Market

EUR/USD
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• EUR/USD moved higher during yesterday’s session, reinforcing the previous uptrend after a trading range pause. The pair is trading above both the 20-period and 200-period moving averages on our four-hour chart, heading towards the 1.3415 resistance level. If a significant penetration of that level occurs, the pair will exit the long-term (daily, weekly) trading range between 1.2750 and 1.3415.

• Support: Support is found at the psychological level of 1.3300, followed by the 1.3185 and 1.3058 respectively.

• Resistance: The only resistance level identified on the short-term horizon (4hour chart) is the recent highs at 1.3415. The next in line are 1.3525 and 1.3705, found from the daily chart.

USD/JPY
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• USD/JPY moved sideways during yesterday’s session, and is still testing the lower line of the downtrend channel and the 61.8% retracement area at 96.75. We expect the price to pull back and return into the downtrend channel, continuing the downward momentum, also confirmed by the bearish cross of the 20-period moving average below the 200-period moving average. On the long term horizon it is forming a possible Head & Shoulders pattern (daily chart), which will be confirmed if the pair breaks below the 95 area.

• Support: Support is the 95 area where the neckline of the daily “head and shoulders” formation lies, followed by the 93.73 level.

• Resistance: Resistance levels are at 97.67, followed by the 100 (psychological level), 100.84 and 101.52.

GBP/USD
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• GBP/USD continued moving higher during yesterday’s trading activity, currently testing resistance at 1.5528. However, since the stochastic oscillator recently exited the overbought area and is now heading towards oversold, we believe we might see the price pulling back before the pair resumes its upward move. Moreover, the pair is trading above both the 20-period and 200-period moving averages, providing bullish indications. On the long term (daily) chart is moving sideways in a trading range between the 1.4811 and 1.5597 boundaries.

• Support: Support levels are at the 1.5431, 1.5201 and 1.5102.

• Resistance: The pair is near the 1.5528 resistance level and a clear penetration of it might lead us to the 1.5674 and 1.5752 levels.

Gold

• Gold moved higher during yesterday’s session, penetrating the upper boundary of the downtrend channel in blue, but leaving the 20-period moving average below the 200-period moving average. It seems that gold is moving higher due to the negative correlation with the USD, although in fact that correlation is not as strong as some would believe; for EUR/USD for example it’s only 36%, down from a peak of 57% back in 2008. The price is currently near the resistance area of 1320.78 and an upward violation of it should lead us upward to the 1347.27 resistance level. On the long term (daily) chart the 20-day moving average remains below the 200-day moving average, thus is still moving in a downtrend.

• Support: Support levels are at 1264.15(50%) and 1245.03(61.8%).

• Resistance: Resistance levels are at 1320.78, 1347.27and 1376.73

Oil

• WTI continued moving lower during yesterday’s session, achieving a clear penetration (daily close) below the blue uptrend line. We consider this as an early bearish signal but we need a significant penetration of the 102.75 support in order to make scenarios for a possible trend reversal. A clear close below this level will signal the completion of the double top reversal formation, which is visible on the 4hour and the daily chart.

• Support: Support levels are at 102.75follwed by the 100.80 and 97.85.

• Resistance: Resistance levels are at 105.70 followed by the 107.53 and the recent highs of 108.89.

BENCHMARK CURRENCY RATES - DAILY GAINERS AND LOSERS

MARKETS SUMMARY