Data from the US on Friday sent the US Dollar Index to a 10-month low, along with expectations of Fed tightening any time soon.
We had argued that US data had the potential to surprise to the upside in H2, yet the dismal set of inflation and consumer spending make this hard to envisage. Therefor we now think it more likely the Fed will trim their balance sheet and keep rates on hold for the rest of the year. Of course, if data does return form the dead then this may be revised, but as we see consumer confidence move lower with spending, this doesn’t look quite likely.
Inflation appears to have topped once more which is a core reason we doubt its ability to reach 2% this year. If commodity prices rebound the perhaps this will have to be revised but as things stand, we doubt inflation overshooting is something the Fed needs to worry about. Yet falling consumer confidence is something they may need to worry about, as it comes at a time when many fear there is a crisis lurking within the auto-vehicle loan. With confidence falling and debt woes rising, then this could feed back into lacklustre consumer spending and lower growth.
The US Dollar index crashed to a 10-month low on Friday which helped commodity currencies push to new highs and send USDJPY to a 2-week low. A bullish divergence has formed on the MACD to warn of weakness to the medium-term trend, yet until price action confirms the divergence by rallying, then the trend remains bearish. RSI is pointing lower which confirms the bearish momentum for the near-term, so the US Dollar is a currency to consider fading into rallies or selling break of new lows.
Out of the commodity currencies it is CAD and AUD which have provided the better opportunities. USDCAD was already having a tough time following the hawkish tone of BoC hike last week, yet the plethora of soft data for US on Friday only added to the reasons to short USDCAD.
As for AUDUSD, all eyes are on the 2016 high which makes 0.7835 the key level for bulls to break. As the week closed just one pip below key resistance, the odds favour an upside break sooner than later. The weekly COTS report shows bullish interest has returned to the Australian Dollar to support the rally, and price action following the report suggests bulls have increased their exposure further. Add into the mix weak US data and the likelihood that traders have switched to net short on the US Dollar Index, then we have all of the required ingredients of a sustained rally and bullish break.
All of a sudden, 0.80 feels very close and the 2015 high of 0.8166 appears achievable. Not that the RBA will be pleased, as a higher AUD increases the odds of an easing bias at their next meeting. Yet unless US data manages to turn around, and quickly, then it’s hard to see AUD rolling over by any meaningful amount.
Matt Simpson | Senior Market Analyst
A certified technical analyst, combining macro themes, monetary policy and business cycles to generate Forex and commodity trade ideas.