G10 FX Weekly – USD bearish sentiment extreme

by: Roy Teo

  • US dollar extends slide as US data disappoints
  • Bearish sentiment in the US dollar near extreme levels
  • Strong currency gains to trigger central banks’ response


 

US dollar extends slide as US data disappoints

The US dollar extended its slide to a fifth consecutive week as weaker than expected US economic data releases have increased market speculation that the Fed will be more cautious in tightening monetary policy later this year.

 

The euro has formed a higher base above 1.11 after Greece managed to meet its EUR 750 million debt obligations to the IMF earlier in the week, using funds from its emergency IMF holding account. In the short term, further gains towards 1.15-1.17 cannot be ruled out as speculative short positions in the Euro are unwound. Stop losses are expected to be layered above 1.1535.

 

The positive momentum in the Australian dollar and sterling continued with technical resistance levels broken. In the short term, further gains are likely towards 0.83 and 1.59 respectively. Firmer oil prices were also supportive of currencies of oil exporters like the Canadian dollar and Norwegian Krona. The rally in both currencies are likely to face some resistance towards the 200 day exponential moving average around 1.19 and 7.30.

 

Bearish sentiment in the US dollar near extreme levels

The US dollar has declined by about 4% against its trade weighted basket of currencies in the past two months. After a weaker than expected first quarter performance, the economic recovery in April has also been slow. However, we think that markets have priced in the risks as the bearish sentiment in the US dollar is near extreme levels. In addition we continue to expect the economy to firm and the Fed to hike rates in September.

 

Strong currency gains to trigger central banks’ response

Though central banks’ do not have an exchange rate target, the strength in the currency is definitely relevant to policy decisions. This was reinforced by BoE governor Carney earlier this week. In the next monetary policy meeting on 3 June, the ECB will likely dismiss fears that QE will end prematurely. Indeed ECB President Draghi recently said that the bond buying program will be implemented ‘in full’ and will in any case stay in place as long as needed for its inflation objective to be fully achieved. The stronger than desired strength in the Australian (AUD) and New Zealand dollar (NZD) is also expected to trigger a response from both central banks. The RBA has stated that further declines in the AUD is likely and necessary. The RBNZ has also reiterated that the current level in the NZD is unjustified and would like to see a weaker exchange rate. Interest rate cuts and intervention in the currency market to weaken the exchange rate are likely options in our view.