The US dollar finally managed to show relative strength today, especially against the commodity currencies. The USD/CAD broke out above the psychologically-important handle of 1.30 following yesterday’s dovish remarks from the Bank of Canada’s governor; a drop in metal prices weighed on the AUD/USD, which slumped below the 0.7850 support, and the NZD/USD dipped below the 0.7300 handle following the publication of New Zealand’s fourth quarter GDP estimate overnight, which was weaker than expected. Meanwhile the USD/JPY came back from being in the red to turn flat and the dollar also rose against the euro, franc and the pound. There was no obvious trigger behind the dollar rebound, as after all today’s US macro data was mixed. But after the recent mixed-bag data releases, including those strong job gains and weak wages growth as reported on Friday, traders may be trimming their short dollar positions ahead of next week’s FOMC meeting.
Earlier, the Philly Fed manufacturing index disappointed expectations with a print of 22.3 versus 25.8 last, while the Empire State index was stronger at 22.5 compared to 13.1 the month before. Meanwhile the weekly unemployment claims were bang in line with the expectations. Tomorrow, we will have a few second-tier US data to look forward to. Among others, these will include the latest figures on building permits, housing starts and industrial production, and the University of Michigan’s closely-followed consumer sentiment index. Next week, the Fed will be in focus. The central bank is almost certain to raise interest rates by another 25 basis points on Wednesday. However it will all be about the FOMC’s outlook for interest rates further into 2018 and beyond, which will be the main focal point for the markets. If recent data have helped to diminish policy makers’ urgency for higher interest rates then this could put further downward pressure on the dollar. However, if the Fed turns out to be more in favour of higher interest rates, perhaps because of expectations that high levels of employment may lead to higher wages and therefore higher inflation in the future, then this could be the trigger for a buck rally, and a possible sell-off for the majors
AUD/USD one to watch
Given today’s dollar rebound and ongoing weakness in metal and other commodity prices, the AUD/USD could be an interesting pair to watch for a possible breakdown here, especially as we will also have important macro data from Australia i.e. jobs numbers to look forward to next week. The Aussie’s break below the 0.7850 support has left behind a clean level for the sellers to potentially defend now. A potential rounded re-test of this level could lead to a drop towards the next support around 0.7730. At the time of this writing, the Aussie was testing another support: the 200-day moving average at 0.7800. A bounce here should not come as a surprise given the extent of today’s drop. Nonetheless, the technical outlook is somewhat bearish and we think an eventual drop towards the long-term trend line around 0.7650 could be on the cards in the coming days. However if price goes back above 0.7900 then this would invalidate the bearish outlook.
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