US dollar gains vs other currencies

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The Australian came under pressure Friday. That was a reaction to the US dollar which was stronger across the board Friday with the Aussie dollar down in sympathy with the moves we saw in forex markets and despite a reasonably solid rally in Chinese iron ore futures. Friday’s price action has darkened the outlook for the AUDUSD which couldn’t get up and through resistance at 79 cents. That being the case the focus turns back toward 0.7730 given that the Aussie traded ended the week near its lows.

When I look at the chart it looks to me like a break of 7800/10 is the key. While it holds we are just in a 1 cent range. If it breaks then it’s 0.7730 and perhaps 0.7650. Much depends on the USD and this week’s CPI.

The US dollar pushed higher against safe-haven currencies the Yen and Swiss franc Friday after the news of the budget passage opened the way for the Trump tax cuts to get closer to execution. What’s important about the tax cuts for forex traders is that it might be the impetus to change perceptions about the path and pace of fed policy vis a vis that of the ECB. That, in turn, may be enough to see the dollar break up and through recent highs in USD Index terms.

That level, 94.20/25, if it gives way, would suggest the next leg of the USD rally is underway with targets around 95.40/96.00 initially.

In Euro terms, the relevant levels are 1.1660/70 and then 1.1525. Only really with a break of 1.1525, or a run above 96 in DXY terms would we be able to say that the US dollar’s outlook has really changed. Otherwise, it’s just a garden variety 38.2% retracement of the previous move.

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​​EU on the mend, led by Germany

Naturally, what the ECB says and does is going to be important this week for the outlook. It’s widely expected in markets that the bank will again reduce the amount of bond buying it will undertake each month. But forex traders recognise that the EU economy, lead strongly by Germany, is on the mend. Indeed, data released Friday showed rising exports boosted the Eurozone’s current account surplus to 33.3 billion euros in August from 31.5 billion in July. That’s the problem for the ECB. The economy is recovering which sends the strong signal monetary accommodation needs to be withdrawn. At the same time, the fact exports aren’t being hurt by the recent Euro strength suggests to traders that maybe these levels aren’t the handbrake on growth Mario Draghi and some of his colleagues suggest it is. This week’s meeting and messaging are going to be interesting.

Elsewhere in forex land, the Pound got a lift from what traders read as a more conciliatory EU in Brexit negotiations. But I’m not convinced that’s actually what we have. Theresa May is struggling to get a deal done on both sides of the channel at present. That said the GBPUSD closed at 1.3180 which is roughly where it is this morning.

The spectre of the solid mandate Shinzo Abe has gained in Sunday’s election has buoyed USDJPY in very early trade Monday. It’s up 0.3% at 113.84 after gaining 0.86% Friday. That Abenomics and an accommodative BoJ are again reinforced will continue to pressure the Yen.

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​​Kiwi under pressure

The Kiwi is suffering under the weight of uncertainty. As discussed above traders and investors are wary of just what the new coalition government and its apparent intervention tendencies will mean for growth. But they don’t like what they see initially. NZDUSD now looks biased back toward the start of the rally at 0.6817.

If you are wondering why the New Zealand dollar got sold so heavily in the wake of Winston Peters decision to go with Labour and anoint Jacinta Ardern as prime minister you need to go no further than some of the headlines like this one from Reuters “Kiwis test new formula in central bank petri dish” or take note of conversations such as the one I heard between Dennis Gartman and Bloomberg Surveillance hosts Tom Keene and Gura. Gartman essentially channelled the implied theme of that headline saying NZ had a leftist government who was going to experiment with the central bank.

And then, of course, Ardern herself has fed investors’ fears about the outlook for the economy and the dollar with her comments that capitalism has failed new Zealanders. Early news reports quoted Ardern saying: “When you have a market economy, it all comes down to whether or not you acknowledge where the market has failed and where intervention is required. Has it failed our people in recent times? Yes. How can you claim you’ve been successful when you have growth roughly 3 per cent, but you’ve got the worst homelessness in the developed world?” You can see where the room for traders and investors uncertainty comes from in statements like that. As a result, the Kiwi remains under pressure.

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