DXY Index Technical Structure Erodes; GBP/USD Basing?
- DXY Index has started to trade back within the range from 2015-2016 - which would mean prior bullish action was a false breakout.
- US yields remain keystone to any USD argument; largest net-short US Treasury position on record in futures market doesn't help.
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The US Dollar is in trouble in the near-term- just look around. The DXY Index has been struggling to regain its composure the past few days, despite what appeared to be supportive commentary from various Fed policymakers, all of whom pointed to the possibility of three rates hikes this year. Yet the greenback's weakness of recent has little to do with monetary policy.
Instead, the source of the recent US Dollar weakness was also the original source of US Dollar strength starting in November: President Donald Trump. While the 'Trump reflation trade' was the theme at the end of 2016 - rising US inflation expectations translating into rising US yields translating into a strong US Dollar - it seems that the market is past its honeymoon.
After numerous Executive Orders that seem to ring true to his campaign promises, markets are no longer looking past any of President Trump's commentary – he is being taken at his word. That includes threats made to major US trade partners about adjusting terms of trade to his public concerns about the strength of the US Dollar (as an impediment to manufacturers’ competitiveness).
For US Dollar traders, the prick of the ‘Trump reflation trade’ bubble draws attention to positioning. In the futures market, non-commercials are holding their largest net-short US Treasury position on record. Similarly, leveraged funds are the most net-long US Dollars since December 2015; DXY Index topped in December 2015 once positioning faded into the early part of 2016.
These factors – confusing messages from President Trump, overstretched positioning – are a caustic mix for the US Dollar in the near-term. The Japanese Yen is perhaps the currency to watch as this is all going on, though. Considering that the Yen has been following the US-JP 2-year rate differential, there is reason to believe that a decline in US yields would serve the Yen favorably. On the other hand, the Yen is also sensitive to equity markets, and just this morning, the US S&P 500 touched fresh all-time highs in the pre-market.
All that this means that USD/JPY may not be the best vehicle to trade. With GBP-crosses basing, GBP/JPY may be eyed for longs should the risk rally take back off. The commodity currency pairs are likewise at interesting levels, with CAD/JPY fighting through a potential topping pattern, while AUD/JPY and NZD/JPY have rallied up to significant long-term resistance (is this the top or part of a cup and handle?). These are opportunities in the market lining up for significant moves – one way or the other.
--- Written by Christopher Vecchio, Senior Currency Strategist
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