The dollar continues its strength and expectations for a significant increase in interest rates this week in FOMC meeting
Robust US economic data that further cemented expectations of a Fed rate hike this week boosted the Dollar. The University of Michigan Survey on Consumer Sentiment surged to a 14 year high in March. Industrial Production for February beat expectations while JOLTS Job Openings jumped to their highest on record. The Dollar Index (USD/DXY) extended gains to end up 0.07% at 90.186. China early this morning named Yi Gang, a deputy governor with international links as new PBOC Governor.
The Dollar was up strongly against the Resource and Asian Emerging Market Currencies, mildly lower against the Yen. The Euro closed a tad lower while Sterling was little-changed. The Fed rate rise by 0.25% is virtually a done deal this week following Friday’s stellar data. Policy divergence as well as short market positioning will eventually drive the Dollar higher. Trade tensions are currently providing a barrier for the Greenback.
This uneven pattern for Dollar’s gains is set to continue with a busy data and event week ahead for the markets. With the FOMC set to meet this week, policy divergence is a driver. The yield on the US Ten year treasury resumed its climb, finishing up 2 basis points at 2.84%. The jury is still out whether we will see a total of three or four Fed rate rises this year.
All the other global bond yields eased. Germany’s Ten year Bund yield eased to 0.57% from 0.58%. Australia’s Ten Year bond yield slipped one basis point to 2.69% while NewZealand’s
ten-year yield fell 3 basis points to 2.82%. The differential between the US and Aussie Ten Year widened to -15 basis points from -11 BPS a week ago. At the start of 2018, Aussie ten-year rates were at a +23 BPS premium over its US counterpart. New Zealand’s Ten-year yield turned to – 2 basis points from +4 BPS a week ago. It’s no wonder the Aussie and Kiwi tanked.
Market positioning will also be a factor that will gain influence in the coming days together with the two themes of trade fears and policy divergence. We have a look at the latest CFTC/Reuters report (week ended March 13) as we look at the individual currencies below.
The Dollar Index (USD/DXY) – closed mildly higher at 90.186 from 90.126 Friday. The Dollar Index managed to hold its gains, thanks to a small dip in the Euro. The Dollar Index traded to an overnight high of 90.378. This puts the immediate resistance at 90.40. The next resistance level is 90.60 with 91.00 a major hurdle. Given the policy divergence and a likely Fed rate hike this week, we could see a grind up to that 91.00 level. Likely range today 90.00-90.40.
EUR/USD – ended mildly lower at 1.2289 from 1.2306 Friday. The Euro was pretty much sidelined with all the action on the Aussie, Kiwi, Loonie and some of the Asian Emerging Market currencies. EUR/USD has immediate resistance at 1.2340 (overnight high was 1.23363). Immediate support can be found at 1.2260 (the overnight low). Likely range today 1.2240-1.2340. If you are not short yet, sell on any rally.
USD/JPY – fell to a more than one week low of 105.60 overnight before rallying to close at 106.02. Buying interest at the lower levels boosted the USD/JPY at the lows. Experience tells me that this buying support us likely from Japanese importers. Expect these interests to be strong, and likely to continue. With risk appetite vulnerable to the uncertain US political scene, USD/JPY, however, remains heavy. USD/JPY has immediate support at 105.80/90 and then 105.60. Immediate resistance can be found at 106.30 and 106.50. The yield on Japan’s ten-year JGB slipped one basis point to 0.03%. Policy divergence, as well as a vigilant Japan Inc at current levels, will put a base on the Dollar-Yen. Today’s likely range 105.80-106.80. Look to buy dips, we could be near a decent base.
AUD/USD – The Aussie was thumped and traded to an overnight low of 0.7710, a level not seen since late December 2017. The Aussie remains on the back foot as lower metals prices, widening interest rate differentials with that of the US, and weaker Asian Emerging Market currencies weigh. AUD/USD has immediate support at 0.7700 and then 0.7680. Further support lies at 0.7650. Immediate resistance is found at 0.7730 and then 0.7750. We can expect some gaps to be filled which may see us back to 0.7750. Likely range today 0.7690-0.7760. Look to sell rallies.
GBP/USD – Sterling was little-changed, finishing at 1.3945 from 1.3943 at the Friday start. GBP/USD traded to a low of 1.3890 before rallying at the close. The outlook for Brexit negotiations remain unclear and any complete agreement will take time. Sterling has immediate resistance at 1.3960 and then 1.3980 with the 1.40 psychological level strong. Immediate support can be found at 1.3920 and then at 1.3900. Likely range today 1.3890-1.3960. Look to sell rallies.
NZD/USD – The “Bird” has had its wings clipped again following the moves of it’s bigger “Cuz” the Aussie. The RBNZ has its policy meeting this week (Thursday) and is expected to keep its official cash rate on hold at 1.75%. The Kiwi will be hostage to a stronger US Dollar and weaker Aussie and Asian EM currencies. With the FOMC meeting set this week, policy divergence will be a key driver of the NZD/USD. At the start of 2018, NZ Ten year yield was at a premium to that of the US for + 29 BPS. On Friday, the Kiwi Ten year yield was at a discount to the US of -2 BPS. That’s huge. The NZD/USD was at 0.7110 then. On that basis alone, go figure where the Kiwi should be now. NZD/USD has immediate support at 0.7200 and 0.7180. Immediate resistance can be found at 0.7230 and 0. 7250… Likely range today 0.7180-0.7260. Look to sell rallies.
Event and Economic Data this week are: The main event for the week is the US FOMC Policy meeting on Wednesday (Thursday morning in Asia). The US G20 meeting continues today and concludes tomorrow in Buenos Aires. The Reserve Bank of New Zealand and the Bank of England have their policy meetings on Thursday with both expecting to keep rates unchanged. There are no major economic data releases today.
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