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DXY Rebounds on Cooling Trade Tensions, Month-End Rebalancing

DXY Rebounds on Cooling Trade Tensions, Month-End Rebalancing

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- DXY Index back to where it started the week; more sideways trading likely into end of month and Good Friday.

- EUR/USD drop driven by more signs Eurozone data momentum is cooling; USD/JPY propped up by rebound in global equities.

- Sentiment for the US Dollar has turned negative into the last week of the month and the quarter.

For longer-term technical and fundamental analysis, and to view DailyFX analysts’ top trading ideas for 2018, check out the DailyFX Trading Guides page.

The US Dollar (via the DXY Index) is back where it opened the week up on Sunday in New York, having been whipped around by cross-asset flows and general sense of relief transpiring on the news wire. US policy officials have suggested that they're working with their Chinese counterparts behind the scenes to resolve the trade dispute, and thus prevent a trade war from materializing.

Indeed, in a week marked by lower participation and thinner volumes in the lead up to Good Friday, Easter, and Passover, the cooling trade tensions between China and the US have proven to be a potent catalyst for risk appetite. US equity markets have swung +/-2% for three days in a row now, the first time that has happened since August 2015; yesterday's point gains in the Dow Jones Industrial Average were the third-best on record.

While this is providing a relief for the US Dollar versus the other safe havens, notably the Japanese Yen and the Swiss Franc, the DXY Index sunk yesterday in what amounts to another piece of evidence that the greenback is a safety currency once again. Today, the DXY Index has been bolstered today against the British Pound and the Euro by what appears to be month-end and quarter-end rebalancing - not a sincere turn in opinion about the dollar.

As noted in the Euro weekly trading forecast, "Speculators have trimmed their net-long Euro contracts from 146.4K to 132.7K in the week ending March 20. With the holiday coming up, this means that a simply closing of open positions to trim risk before the holiday could see the Euro trade lower."

The same goes for the British Pound: at 23.8K net-long contracts, speculators are near their most bullish level of the year against the British Pound (and most since December 2014). Any pullback in EUR/USD and GBP/USD is likely driven by traders closing out long positions ahead of the holiday weekend as the month and quarter come to a close; it's far too early to say that the US Dollar's longer-term downtrend is over.

Read more: FX Markets Turn to US & Canadian GDP, US & German Inflation

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--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

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