After reaching its highest level since September 2013, has the dollar turned a corner, and can we expect further upside?
Below we point out three things that could get in the way of further gains for the buck:
- • Firstly, the yield effect. U.S. 2-Year yields started to follow U.S. 10-Year yields lower last week, which may have been one reason why the rally in the greenback stalled. If the market starts to believe that Fed tightening will only happen at a glacial pace then there could be further weakness in yields, which could limit USD upside.
Due to this it is worth watching the President of the New York Fed, William Dudley, who is speaking on Wednesday at 1405 BST/ 0905 ET. He is a powerful member of Janet Yellen’s inner circle at the Fed, and if he hints that policy will continue to remain accommodative then 2-year yields could fall further. - • Geopolitical risk can also hurt the dollar. This risk weighed on 10-year yields, pushing them to their lowest level in 14 months, it also triggered a decline in USDJPY, which backed away from 103.00 highs and is now managing to find a cluster of moving average support at 101.95 – 102.10.
For the USD rally to be broad-based, we think the buck needs to get its groove back vs. the JPY, and make a move towards the April highs above 104.00. - • The technical picture for the US Dollar Index is also looking a bit shaky. The failure to close the week above 81.76 – the August 6th high – was a disappointment.
Momentum is falling and with strong resistance in site at 81.82, the 50% retracement of the July 2013 – May 2014 bear trade, investors may choose to take profit. Only if set-backs are limited can we expect to see further upside towards 82.51.
At the start of the week we would urge dollar bulls to tread carefully. Watch out for any further declines in the 2-year yield, keep an eye on what USDJPY is doing and remember to watch the development of the technical picture.
Looking further ahead, dollar bulls may have to be selective about the pairs they choose. Over the last month the dollar has outperformed all G10 currencies, however, the yen, NOK and SEK are starting to claw back recent losses. We think the pound could also reverse recent losses vs. the USD, which leaves the NZD, CAD and EUR still vulnerable to bouts of dollar strength.
To conclude, it may be too early to call the recent dollar strength a turning point. A break above 81.75 – the August 6th high – would be a bullish development in the short-term. If you believe the dollar will continue its march higher, we would urge caution and recommend you look at potential opportunities versus the CAD and NZD, which may come under further pressure vs. the greenback in the coming days and weeks.
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