US Dollar Index (DXY) Talking Points:
- US Dollar Index Technical Analysis: DXY failed at resistance, bearish < 90.93
- Flattening yield curve calls out Fed’s terminal rate bets as HFs refuse to step up DXY bids
- Trader Sentiment Highlight from IG UK: EUR/USD bearish bias from retail favors upside
The FX market came face to face with an uncomfortable dilemma last week. The Federal Reserve’s minutes were unanimously hawkish when looking at the near-term outlook. Typically, this would have been a catalyst enough to lift the US Dollar and see the short-positions covered. Unfortunately, the US 10-year Treasury Note yield at 2.84% remains under the anticipated Federal Reserve terminal rate at 3.375%. In other words, either the global forces that direct the US 10-year need to adjust or the Fed does.
This morning’s tweet from President Trump displayed his apparent dissatisfaction with the current levels of the US Dollar despite it sitting near the lowest levels on a broad trade-weighted basis since 2015. Either way, Trump’s ability to appoint created vacancies of the Fed could further push the upcoming rhetoric more dovish down the road though this view is speculative at best.
Positioning Fails To Budge Despite A Hawkish Fed
Data source: Bloomberg
A look at the net positioning on the ICE DXY shows that institutional funds remain unwilling to be big on the US Dollar moving higher. At the same time, G10 FX Volatility is near the lowest levels of the year according to Deutsche Bank’s Currency Volatility Index. Such low levels tend to ward off dip buyers as trend shocks and reversals are always hard to call, but specifically in low-volatility regimes like we currency see in FX.
The US is Losing The Yield Curve Battle To Germany
Data source: Bloomberg
A key focus for macro investors has been the ever-flattening US yield curve, which looks to call out the Federal Reserve and their current terminal rate. Looking across the global board, Germany has had a widening 2/10 yield curve though the DE 2-year remains below zero to a tune of 59 basis points to the US’ 237 bps above zero for a spread of 298 bps, the widest on record.
For traders dead set on buying USD, they should likely look to play their downtrodden view against other weak currencies like the Japanese Yen. The yield gap between US and Japan may drag USD/JPY higher as the start of the Japanese fiscal year could encourage renewed capital outflows from Japan and weaken the JPY further.
DXY Technical Update – Daily Chart Shows Price Approaching Breakdown Point
Chart Source: Pro Real Time with IG UK Price Feed. Created by Tyler Yell, CMT
The indicator that helps traders see where the bearish pressure that currently clouds the DXY could turn to bullish pressure is the Ichimoku Cloud. The lagging line, which acts as a momentum filter favors further weakness and until the lagging line breaks above the cloud and prior price, favoring downside remains my bias and positioning.
Recently, I put together an Ichimoku-focused report that highlighted the US Dollar available here
The US Dollar Index has traded in a word, sideways. The consolidating view would favor eventual continuation of the broader downtrend. This bearish view would only be negated on a close above 90.20, the April opening range high or a break above 90.93.
Until then, the US Dollar short trade appears to have multiple supporting factors that are not diminishing.
Unlock our Q2 forecast to learn what will drive trends for the US Dollar through 2018!
Insight from IG Client Positioning: Traders are Net-Short Suggesting EURUSD May Rise
EUR/USD sentiment is analyzed for insight since EUR/USD makes up 57.6% of DXY.
We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EURUSD-bullish contrarian trading bias.
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---Written by Tyler Yell, CMT
Tyler Yell is a Chartered Market Technician. Tyler provides Technical analysis that is powered by fundamental factors on key markets as well as t1rading educational resources. Read more of Tyler’s Technical reports via his bio page.
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