USD is the global wrecking ball and it's breaking higher
Talk on the floors is that the fast money leveraged accounts are buying USDs and this seems counter to the moves seen in rates, with the Eurodollar market pricing out a small degree of hikes. Consider that next week we get US ISM manufacturing data and US payrolls and they're both expected to be very strong.
We’re seeing US real Treasury moving to the middle of the recent consolidation range and the USD bulls really need to push through the consolidation high. That would offer genuine conviction that the USD move has tailwinds.
If we focus specifically on the USD index (DXY) and scroll out, we see a similar set-up as in 2018. Will we see a repeat? Recall, the USD index is weighted 57% by EUR, so if the DXY is headed higher it shows the USD rallying against a basket of currencies, but heavily skewed towards the EUR.
Homing in, we see a pronounced cup and handle continuation pattern, with price moving through the 200-day MA. It argues for higher levels in the USD with 94.78 a key level and this takes EURUSD into 1.1600. A move higher in the USD may weigh on emerging markets, and when it comes to equity sentiment we need to see why the USD is rallying – we could see a stronger USD and higher equities if the reason is the US data is strong.
While the CNH (yuan) is not part of the DXY basket, it's incredibly influential to the reflation trade – that being long commodities, cyclical stocks, short US Treasuries. If the CNH weakens further then this heavily positioned reflation trade will be questioned.
The material provided here has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Whilst it is not subject to any prohibition on dealing ahead of the dissemination of investment research we will not seek to take any advantage before providing it to our clients. Pepperstone doesn’t represent that the material provided here is accurate, current or complete, and therefore shouldn’t be relied upon as such. The information, whether from a third party or not, isn’t to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any security, financial product or instrument; or to participate in any particular trading strategy. It does not take into account readers’ financial situation or investment objectives. We advise any readers of this content to seek their own advice. Without the approval of Pepperstone, reproduction or redistribution of this information isn’t permitted.