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Since late July, I have been looking for the Australian dollar to turn lower. Instead, the Aussie has continued to climb. It has risen in ten of the past eleven weeks. As this Great Graphic, created on Bloomberg, these gains have brought the Australian dollar toward a three-year downtrend line drawn off the April 2013 and the June-July highs from 2014.
It is as if Hamlet, the confused prince of Denmark, has taken up residence in Beijing. The famed-prince wrestled with "seeming" and "being". So are Chinese officials. They seem to be relaxing their control financial markets, but are they really? Are they tolerating market forces because they approve what they are doing, such as driving interest rates down or weakening the yuan? If so what happens when the markets do something for which they don’t approve?
The US dollar is enjoying a mid-week bounce against all the major currencies. It appears that participants in Asia and Europe are giving more credence to NY Fed Dudley's comments yesterday. Although many in the market have given up on a rate hike this year, Dudley reaffirmed his belief that the economy was accelerating in H2 and that the market was being too complacent.
This Great Graphic was created on Bloomberg. I use it to illustrate a possible head and shoulder pattern that has been carved by the US dollar against the yen. Head and shoulders patterns are most often regarded as a reversal pattern.
Some purists may insist this is always the case, yet many technicians recognize that on a rare occasion, the head and shoulders pattern can point to the continuation of the existing move.
The US dollar is being sold across the board today. The US Dollar Index is off 0.65% late in the European morning, which, if sustained, would make it the largest drop in two weeks. The proximate cause being cited by participants and the media is weak US data that is prompting a Fed re-think.
However, we are a bit skeptical. It is not that the US data has been strong, or that Fed officials have been touting the need to hike like many regional Fed Presidents did earlier this year. Rather our skepticism is based in the prices themselves.
Today is anniversary of the final blow to the dollar-gold standard. By August 15, 1971, the exchange of dollars for gold was limited to central banks, and US President Nixon unilaterally ended it. There was a brief attempt to resurrect it with new parities that failed, and thus beginning the current era of floating exchange rates.
The US dollar closed the pre-weekend session well off its lows that were seen in response to the disappointing retail sales report. It has been unable to sustain the upside momentum, and as North American dealers prepare to return to their posts, it is trading lower against most of the major currencies. The notable exceptions are the Scandi-bloc, which are consolidating last week's gains, and sterling, which remains pinned near $1.29.
EM FX ended the week on a soft note, despite the weaker than expected US retail sales report. Official concern about strong exchange rates is beginning to emerge. First, it was Korea, and then on Friday it was Brazil as acting President Temer said his country needs to maintain a balanced exchange rate, neither too weak nor too strong.
We expect more pushback to emerge if the current rally is extended. Still, the global liquidity outlook for now favors EM and "risk."
Japan's Q2 GDP: The week begins off with the first estimate of Japan's Q2 GDP. Growth is expected to slow from 0.6% in Q1 to 0.2%-0.3% in Q2. Consumption likely slowed more than investment increased. The GDP deflator, another measure of prices, is expected to have eased to 0.7% from 0.9% (year-over-year).
Speculative position adjustments in the currency futures continued at a low pace in the Commitment of Traders report for the week ending August 9. There were though two distinct patterns.
The first pattern is found in the euro, Swiss franc, and Mexican peso. In these currency futures, speculators reduced exposure. Longs were liquidated and shorts were covered. The adjustments were small with only the 9.8 contract reduction of the gross short euro position more than 5k contracts.
The dollar's push lower that we anticipate until later in the month gained momentum following the disappointing US retail sales report before the weekend. The dollar's technical tone has deteriorated, while the economic data is unlikely to be sufficient to reverse sentiment.
S&P upgraded Korea a notch to AA with a stable outlook, Voters passed the constitutional referendum in Thailand by a wide margin, The IMF and Egypt have reached a staff-level agreement on a 3-year $12 bln loan program, Argentina’s central bank will begin using a new overnight rate to manage monetary policy, Political uncertainty has returned to Brazil