After a strong start to this week’s trade, the U.S. dollar was on its back foot on the final trading day of the week, month and quarter.
The proximate cause for the buck’s weakness is good news overseas: specifically, the EU countries reached an agreement on migration, while the UK’s Q1 GDP was revised up by 10 basis points to 0.2% quarter-over-quarter. Talk that U.S. President Trump is considering pulling out of the World Trade Organization (in contrast to the cooperative headlines out of Europe) may also be contributing the greenback's bearish sentiment.
Technically speaking, the U.S. Dollar Index remains within its clear uptrend, which has taken it from around 89 in mid-April to a high near 95.50 on Thursday. Some U.S. dollar bears have noted that the dollar's peak coincides, to the pip, with the high from last week and have posited that this could mark a potential “double top” pattern for the buck:
Source: TradingView, FOREX.com
Hold Your Position
While we agree this could ultimately prove to be a double top pattern, bulls may want to avoid flipping their outlook on the world’s reserve currency just yet. For one, the pattern won’t be confirmed until and unless rates break below the “neckline” (or the trough between to the two highs) at 94.20; until that time, traders may prefer to place more weight on the dollar’s established bullish trend.
More importantly, today brought the end of the second quarter, and quarter-end is a time when wonky things happen in the FX market. Because most global portfolio managers report performance as of the end of the quarter, they often use the last couple days to rebalance their existing exposures and currency hedges.
If the value of one country’s equity and bond markets increases, these money managers typically look to sell or hedge their elevated risk in that country’s currency and rebalance their exposure back to an underperforming country’s currency. The more severe the change in a country’s asset valuations, the more likely portfolio managers are either under- or over-exposed to certain currencies.
Put simply, if US stock and bond markets outperform their European counterparts over a three-month period (as they have this quarter), large global investors end up with more exposure to the US dollar by default. Therefore, they may look to sell or hedge the USD to bring their currency exposure back to target weights. Seen from this perspective, it would be strange if we weren’t seeing a dip in the dollar heading into quarter's end.
It’s also worth noting that the U.S. Independence Day holiday is next Wednesday, so many U.S. traders will be away from their desks throughout next week. With liquidity at a low ebb, the dollar could see inconsistent price action (either larger-than-usual volatility if there are any market-moving economic developments or, more likely, slower trade than usual if there’s nothing to shake things up).
As you can see, market conditions for the U.S. dollar are a bit abnormal (and likely will continue to be in the next week), so traders should exercise more caution than usual when interpreting the price action in the world’s reserve currency.
Cheers