Want to know what our top minds think about the USD trend?

Talking Points:

  • Soft US Data pulls down surprise index to 1yr low
  • US Yields pushing lower showing hope for Fed action increasingly in doubt
  • Sentiment Highlight: EUR/JPY uptrend fought by retail crowd, contrarian bullish signal in play

Weak US data continues to pile up. The Citi Economic Surprise Index hit its lowest level in a year on Friday after US retail sales and CPI data was released. Many traders were encouraged earlier in the month at the FOMC meeting when the Fed saw the soft data as transitory. However, it is worth noting that other economies with more resilient data of late had central bankers this week that saw the good data as transitory, and the RBNZ even shifted their inflation forecasts lower.

This week, we have seen a few larger bets in the Fixed Income space align with what has been seen in the commodity markets, lower inflation and likely less need for aggressive central bank action in regards to raising interest rates. Specifically, there has been buying in short-term rates markets that would benefit or less Fed action than expected, which would be expected to pull down DXY. The chart of the day below shows a strong move lower in the US 10yr yield, which quickly reversed to weekly lows on Friday. All of the importance can not be limited to trading near weekly lows on Friday, but also that we failed to see further upside beyond the 100-DMA and Ichimoku Cloud. This breakdown in US10Y Yields (among other things) could well argue that there is not enough inflation pressure on the horizon to keep Treasuries bid and DXY supported.

The last insight worth mentioning gained on Friday was that the options market continues to show downside exposure preferred on USD vs. upside. A few options metrics like 25d risk reversals or “riskies” on tenors from one week to one year are showing an expectation for lower volatility and dollar downside. Specifically, per Bloomberg, one week 25-delta risk reversals on GBP/USD are the highest since November, and same goes for one month 25-delta risk reversals on EUR/USD. Higher 25-delta “riskies” shows that traders are putting a premium on capturing the upside as opposed to the downside. While this is not a crystal ball, it shows that traders are not paying to protect against USD upside in multiple markets. That may be worth noting.

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Closing Bell’s Top Chart: May 12, 2017, US10 Yield Fails at 100-DMA, Ichimoku Cloud. Breakdown USD

US Data Disappoints Most in One Year, Doubt on Fed Action Grows

The Weekend's Main Event:G7 Finance Ministers and Central Bankers In Bari, Italy

The market’s focus on this event will be for any discussion on Trade Policy from US Treasury Secretary Steven Mnuchin. This weekend is an opportunity for markets to understand better what the US Government is thinking and planning regarding global trade renegotiations.

IG Client Sentiment Highlight: EUR/JPY Net-Shorts Increase by 39.1%, Contrarian Bullish Signal

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

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US Data Disappoints Most in One Year, Doubt on Fed Action Grows

EURJPY: As of May 12, retail trader data shows 30.9% of traders are net-long with the ratio of traders short to long at 2.24 to 1. In fact, traders have remained net-short since Apr 25 when EURJPY traded near 119.343; theprice has moved 3.7% higher since then. The number of traders net-long is 6.6% higher than yesterday and 4.3% higher from last week, while the number of traders net-short is 0.6% lower than yesterday and 39.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURJPY prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURJPY trading bias.(Emphasis Mine)

The aggressive rise in net-short-positioning on a week-on-week basis in EUR/JPY places doubt on a sustainable move lower. An index I run internally for strong vs. weak pairing currently shows EUR/JPY as the strong, weak pair (EUR is strong), which favors further upside along with the sentiment insight above.

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Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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