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Video: Dollar Posts Strongest 2-Day Rally of 2017 to Nowhere

Video: Dollar Posts Strongest 2-Day Rally of 2017 to Nowhere

2017-05-10 03:06:00
John Kicklighter, Chief Strategist
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Talking Points:

  • The DXY Dollar Index marked its strongest two-day rally since December 15 but it does little to secure trend
  • EUR/USD, AUD/USD and NZD/USD face key technical boundaries while GBP/USD and USD/JPY trends hide fundamental issues
  • It is better to look for measured moves in this low volatility environment, but mind the BoE and RBNZ decisions ahead

See how retail traders are changing their positions on the Dollar-based majors following the Greenback's charge higher this week following two weeks of indecision on the DailyFX Sentiment page.

The markets are still pushing the extremes that leverage anticipation and anxiety rather than opportunity and action. A backdrop of extreme inactivity persists with the VIX closing at 10 to raise the count of readings this low to 11 in the series' 27 year history. The 10-day (2 week) realized volatility reading on the S&P 500 meanwhile has ticked slightly higher but remains below 3.0 percent annualized activity for only the fourth time in 45 years. Traditionally, these low volatility / low risk conditions could readily promote a productive extension on risk markets; but the inaction seems to increasingly undercut bulls' confidence. Benchmark equity indexes from the US, Europe and Asia were little moved with a small retreat through the session. More extreme assets on the scale like the Emerging Market and High-Yield Fixed Income ETFs offered mixed performance but were uniformly uncommitted to trend. Arguably, the most productive trend to arise from current 'risk' assets this week is the Dollar.

While the Greenback is not historically considered a high risk, high return asset; it deserves the title at the moment. In a record low rate environment the world over, the Fed is leading the charge with hikes that will slow draw funds to US assets. That has encouraged opportunists (traders) to get in ahead of the slow moving wave. As long as the economy and financial system continue to perform well, the central bank will pursue its tightening regime. That said, the DXY Dollar Index has posted its biggest two-day advance since the December 14-15 climb that followed the rate hike that month. Given the lack of fundamental motivation behind this advance and the general proximity of technical boundaries, we should evaluate the situation for what is likely versus what we would prefer to unfold. The technical boundaries showing up for pairs like EUR/USD, GBP/USD and even AUD/USD speak more soundly of our opportunities.

From the Cable (GBP/USD) and NZD/USD, there are proximate technical boundaries to work with; but neither range nor breakout/trend approach may be suitable for these pairs. There is high profile event risk ahead for both the Sterling and Kiwi Dollar over the next 48 hours. That poses the risk of high volatility should these policy authorities deliver the unexpected, but it will more certainly curb ambitions in the lead up. For the Dollar-based Pound pair, that may not put off many traders given its measured pace; but the crosses have drawn a lot more attention and hope with what looks like long-term technical reversals. There is considerable opportunity from this beleaguered currency given 'worst case scenario' assumptions that have heaped upon it after the Brexit and BoE's efforts. As that lifts, we will likely see this recovery continue. Yet, we should be mindful of our passive exposure. For the Kiwi, the assumptions run even deeper. A status quo expectation is well founded, but the RBNZ has a history of delivering unexpected changes to their policy. Traders would do well to be prepared. We discuss focus on the active Dollar and passive risk backdrop in today's Trading Video.

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Video: Dollar Posts Strongest 2-Day Rally of 2017 to NowhereVideo: Dollar Posts Strongest 2-Day Rally of 2017 to Nowhere

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