Trading an All-About-The-Dollar Week
Yesterday has come and gone, and another Yellen talk took place and has left financial markets and traders looking for a direction.
In a nutshell, despite the hugely disappointing US job employment numbers of last week, the Chair of the Federal Reserve did not remove a rate hike from the horizon of the next months. Still, the market didn’t buy it, and traders punished the USD as a response – after all, Yellen only vaguely mentioned ‘coming months’, without making any reference to June or July.
Be as it may, we believe this week should be an all-about-the-USD trading week, since the Fed is only one week away from making its decision. We also believe that the DXY resilience (which has been consistently keeping it together near the 94 range, with some ups and downs along the way) is a very clear image of just how the market has already priced in the Fed’s hesitations.
While we don’t expect the Fed to hike rates in the middle of June, as we’ve previously said, because we think that the Brexit risks would discourage it from doing so, we don’t see the USD correcting far more to the downside, even if our belief is confirmed.
After all, ever since the USD rally has paused, many Fed members have said one thing and its opposite, again and again, and the DXY never stayed below 94 for too long. In our view, that is because, at the end of the day, the Fed isn’t easing – even if it does not hike rates soon – while the ECB and the BOJ keep on looking for more creative ways to ease even further.
We see this resilience as a bottoming opportunity for the USD bullish positions that we have consistently been recommending.
We would not be surprised to see the RBA announcing lower interest rates today (yesterday we made our bearish AUD case, and talked about how profitable a long USD/AUD play could be), and we wouldn’t be surprised either to see API’s crude oil inventories surprising markets to the downside.
As much as the oil market may seem to be rebalancing (due to temporary constraints originating in Canada and Nigeria), we just don’t see how the current staggering amount of oil in tankers throughout the oceans of the world won’t send oil down to the $30s again. We also suspect that Iran and Saudi Arabia will keep on fighting until these $30s, as well.
This makes us restate our past long USD/MXN, USD/NOK and USD/CAD recommendations for traders, because we don’t see any upside to those currencies, based on an expectable oil correction, while we don’t see any significant downside to the USD, which has already suffered most of the Fed-confusing-statement-induced dovish shocks.
At the end of the day, investors should look for greater profits to be made in currencies and assets that offer less resistance, which is the case of the USD, and should bet against currencies and assets that are still dancing filled with enthusiasm – even when the music is coming to an end.