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The Daily Fix: The USD pushing into the top of the channel

Chris Weston
Head of Research
Jan 12, 2021
After writing in-depth about the potential for the USD to put in a trading low, centred on the premise of higher real Treasury yields, we can see the USD is working well against all G10 currencies – notably the ZAR, NOK and NZD.

US real Treasury yields have gained 5bp on 5s and 3bp in 10s and this has helped push the USDX up 0.5%. Bitcoin and the crypto space more broadly have been slammed, but you wonder how much of this was down to someone getting out of a position – the whales will tell you when they’re getting in, but when they’re reducing then its radio silence and this makes sense. Is this the flush out that needed to play out? It seems so, and once again when trading any market were the 10-day vol is 125% this is a lesson in correct position sizing relative not just to the size of the account but on the market volatility.

We’ve also seen copper and iron ore futures lower by 3.2% and 2% respectively and we’ve seen equity vol ramp up with the VIX at 24.08%, indicating the market sees the S&P500 averaging 1.5% daily moves the coming 30 days.

The USD move interests though and the fact the S&P500 fell 0.7% and NAS100 -1.6% suggests if the USD is to rally as the best house in the neighbourhood (i.e., exceptionalism) then it isn’t the case now. At this juncture, the move looks like a pure positioning adjustment – see the weekly CFTC report of non-commercial players in USD index futures near record lows as of last Tuesday.

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Source: Bloomberg

USDCNH has been core to the global reflation trade and I continue to watch price action in this cross as an essential variable in the macro framework - until I see price breaking the bear channel (I’ve drawn a regression channel on the daily) it’s held since May then it’s hard to see the USD having a broad-based shift higher, which would put real question marks about the sustainability of the global reflation exposures. Again, US real yields should dictate, but I want to see price ideally break the 6.4971 (9 Dec low) and then 6.5356 to increase convictions here.

USDCNH daily

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USDCNH weekly – again drawn with a regression channel. The bear channel is mature but it's still in play.

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In the USDX, which is one way of playing the USD with the basket is 57% weighted to the EUR, and we can see price has broken above the 5-day EMA and October downtrend. This plays into my fundamental view that the risks to the USD have become far more symmetrical and two-way.

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That said, sellers have kicked into the top of the standard deviation channel and we can see stochastic momentum and the RSI has hit the mid-range, so the prospect is that the USD has put in a short-term bottom and may chop around for a bit. However, more work needs to play out before buying the USD to open positions with any conviction.

The green shaded area represents the 2018 low, which should cap any further selling and offer a high conviction buy, should it reach here.

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