In the FX review this week, we run through the reasons behind the weakness in the US Dollar, along with major data releases up ahead that are worth watching out for.
USD losing it’s shine
After posting several weeks of strong gains across the board, last week we saw the USD lose ground against most peers. In key pairs this meant that GBPUSD could rise above 1.2600, with EURUSD easily closing above the 1.0700 handle on Friday.
We put this down to several reasons. Firstly, it’s natural to see some profit taking on long USD positions from traders. After showing some signs of consolidating in the previous week, people were likely keen to exit positions and book profits ahead of the month end.
Secondly, we do note that US yields have also stalled, giving rise to some bond investors coming out and saying that yields may have peaked. If this is the case then one of the core pillars of USD strength might not be that supportive. Higher yields help to boost a currency as the buyer gets rewarded with a higher carry versus a lower yielding alternative.
Thirdly, global risk sentiment improved last week. Equities performed much better, and news headlines didn’t offer any reason to be overly pessimistic. So the safe haven demand that usually follows the USD was deserted last week in favor of higher beta options such as AUD.
A blip or more to come?
Personally, we like to fade this USD weakness and buy the dip. We don’t think that other currencies materially offer a better outlook than the US. For example, in the UK the Bank of England are forecasting negative GDP growth come Q4. Pressure will likely be in place to cut rates earlier next year. So even though this move in GBPUSD could have further to run in coming days, we won’t be chasing it. Rather, when the turn starts to come, we think getting short is the best play.
For those wanting to squeeze a little more out of the move, we continue to favor being short USDCAD. One pair that we’d avoid is getting short USDCHF. The rate differentials are still large, and we think this is a pair that a long position could start to look attractive anywhere in the 0.95’s.
Big week ahead
Next week could offer some drama, with major data releases combined with lower liquidity due to bank holidays. Here in the UK, the Queen’s jubilee will mean that London is out from Thursday onwards. This coincides with US NFP’s on Friday, Eurozone Retail Sales on Friday and ADP unemployment on Thursday.
It’s worth noting these ahead of time, as moves could be exacerbated in the short term.