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USD is the global wrecking ball and it's breaking higher

Head of Research

25 mars 2021

I wrote about the two-way risk EURUSD earlier in the week and it's clear that's been resolved, with traders speculating the pair as it heads to the September and November lows of 1.1600.

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.

(Source: Bloomberg)

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.

(Source: Bloomberg)

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.

(Source: Bloomberg)

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.

(Source: Bloomberg)

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