Today is the end of the quarter so we will get the IMF’s COFER report on currency reserves from Q1. This is when the dollar was very strong. We should therefore expect the dollar value of reserves to fall and for the dollar’s share to rise purely on valuation effects.
The US dollar is extending its recent gains against most major currencies today. The euro is lower for the third session after a rebuffing of last week’s attempt above $1.1400. While today’s euro losses began in Asia, Europe has taken it down further. The single currency is approaching the 20-day moving (~$1.1206), which it has not traded through since June 8.
The US dollar struggles, despite the Federal Reserve’s upgrade of its economic assessment and confirmation that it still anticipates raising rates this year. At the same time, the Greece situation has devolved, and the run on deposits has accelerated, which forced to the ECB to lift its ELA ceiling twice within a couple of days.
After the strong US jobs data, there was no follow through buying of the dollar. The greenback fell against all the major currencies last week, save the New Zealand dollar, where the central bank cut rates and signaled the likelihood of another one.
The dollar often appears confined to a trading range against the yen. This was the case from last December through mid-May. When it looks like it is trending, as it did from mid-May through the end of last week, it often is moving from one range to another.
The strong US employment data stopped the dollar’s downside correction in its tracks. It offset the unwinding of the long German bund/short euro hedge that had sent the euro racing toward $1.14. The Japanese yen and New Zealand dollar fell to new multi-year lows.
The US dollar had been in a broad trading range against the yen since last December. The marginal new high seen in March to about JPY122 proved to be a false break, and the dollar returned to its well-worn ranges. After testing the lower end of an even narrower range around near JPY119 on May 14, the greenback has rallied about 4% to approach JPY123.80 earlier today. This is the highest level the dollar has reached against the yen since June 2007 (~JPY124.15), which itself was the highest since the end of 2002 (JPY125.70).
The US dollar had begun the week on a firm note, but those gains have been trimmed in the second half of the week. The confirmation that a June hike was highly unlikely coupled with some softer US data took a toll. The UK’s surprisingly strong retail sales report lifted sterling. The greenback had tested the upper end of its range against the yen, nearing JPY121.50 but it ran into profit taking as US yields softened.
“If you ain’t cheating, you ain’t trying” were the words of one trader working in the foreign exchange market. They belie an attitude that was widespread among traders in this market between 2009 and 2013. Cheating was simply a normal part of a trader’s day job. In fact, not cheating would be to shirk your duties.
The dollar bullish divergence story appears to have hit a wall. With US Q1 GDP likely to have contracted by around 1% at an annualized rate in Q1 and Q2 off to a weak start, whispers of a recession are not only in the blogosphere, but also in the halls of the House of Finance. The opportunity that the Fed is looking for to hike rates may not materialize.
