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5 Aug 2013
What does the future hold for the DXY after last week’s barrage of data?
FXstreet.com (Barcelona) - The fate of interest rates seems to still be in the hands of the FOMC and their central banker buddies from around the world. However, can the same be said of the FOMC's grip on the US Dollar Index (DXY)? Perhaps / perhaps not.
Recap of last week’s data and reactions
Early last week brought traders pretty much the ideal scenario for those long of risk assets: an "easy money" ECB; an FOMC announcing they were not altering their QE / bond buying program for the foreseeable future; a slight positive surprise on the Chinese manufacturing PMI; a better ISM manufacturing number; and, a decrease in weekly jobless claims that served to keep the bears on the defensive. All that data and news served to push interest rates and the DXY up to resistance at 2.723% and 82.42, respectively.
Friday, however, the US non-farms payroll data came in slightly below expectations and both the interest rates and the US Dollar reversed course and headed lower rapidly (away from resistance).
Traders asking, “What’s next?”
So, what happens next for the greenback? Will the US bond vigilantes succeed in pushing rates up through resistance and confirming that a new secular bull market in rates (bear market in bond prices) is under way? Or, will the Fed succeed in keeping rates contained – thereby continuing to allow for asset prices to rise in what appears to be a no / low inflation environment?
In the first scenario, the DXY would likely react bullishly to the vigilantes’ success in crushing bonds / boosting rates. A breakout above not only the 82.42 resistance but up through the July peak at 84.75 would almost certainly occur if rates broke out.
In the second scenario where the Fed succeeds in keeping rates contained, one would intuitively think that the DXY also would remain subdued. However, unlike rates, when looking at the Dollar Index we have to consider what may be happening with the countries and currencies with whom the US Dollar trades. The two biggest components of the DXY are Europe and Japan. The current narrative out of Europe is that things are improving off of a very low base – which is giving the euro a temporary boost. The narrative out of Japan, though, is less clear. One week we hear of rumors of Japan employing more hawkish fiscal and monetary policies to straighten out their balance sheet – thereby boosting the Yen. Another week, we might hear about Japan’s Abenomics continuing to remain in effect – thereby keeping a lid on the Yen. This week brings us plenty of data and news out of Japan - including a Bank of Japan interest rate decision later in the week - so traders will get some very clear direction right from the source.
All of these fundamental cross-currents are enough to make traders’ heads spin – which is why so many are now watching the technicals so carefully.
Technical outlook for the greenback
Technicians are currently calling for some more downside to occur in the greenback in the short-term – perhaps taking the DXY down to 80.71 from 82.03 currently. Once the DXY establishes a low in the short-term, technicians are forecasting a very sizeable rally in the DXY which will likely create new multi-year highs and may test the 6/2010 peak at 88.71. That would seem to make sense as those same technicians are calling for only a bit more upside in the euro and Yen before longer-term downtrend resume for each of them.
So, translating from technical to fundamental to wrap things up – the Fed may succeed in keeping rates under their desired level for a bit longer, but (if the technical crowd is correct in their forecasts) they may lose control of rates and the US Dollar starting at some point pretty soon. Technicians say that this outlook will be invalidated by a close below 80.71 – so traders would be wise to earmark that level when constructing their investing / trading plans.
Recap of last week’s data and reactions
Early last week brought traders pretty much the ideal scenario for those long of risk assets: an "easy money" ECB; an FOMC announcing they were not altering their QE / bond buying program for the foreseeable future; a slight positive surprise on the Chinese manufacturing PMI; a better ISM manufacturing number; and, a decrease in weekly jobless claims that served to keep the bears on the defensive. All that data and news served to push interest rates and the DXY up to resistance at 2.723% and 82.42, respectively.
Friday, however, the US non-farms payroll data came in slightly below expectations and both the interest rates and the US Dollar reversed course and headed lower rapidly (away from resistance).
Traders asking, “What’s next?”
So, what happens next for the greenback? Will the US bond vigilantes succeed in pushing rates up through resistance and confirming that a new secular bull market in rates (bear market in bond prices) is under way? Or, will the Fed succeed in keeping rates contained – thereby continuing to allow for asset prices to rise in what appears to be a no / low inflation environment?
In the first scenario, the DXY would likely react bullishly to the vigilantes’ success in crushing bonds / boosting rates. A breakout above not only the 82.42 resistance but up through the July peak at 84.75 would almost certainly occur if rates broke out.
In the second scenario where the Fed succeeds in keeping rates contained, one would intuitively think that the DXY also would remain subdued. However, unlike rates, when looking at the Dollar Index we have to consider what may be happening with the countries and currencies with whom the US Dollar trades. The two biggest components of the DXY are Europe and Japan. The current narrative out of Europe is that things are improving off of a very low base – which is giving the euro a temporary boost. The narrative out of Japan, though, is less clear. One week we hear of rumors of Japan employing more hawkish fiscal and monetary policies to straighten out their balance sheet – thereby boosting the Yen. Another week, we might hear about Japan’s Abenomics continuing to remain in effect – thereby keeping a lid on the Yen. This week brings us plenty of data and news out of Japan - including a Bank of Japan interest rate decision later in the week - so traders will get some very clear direction right from the source.
All of these fundamental cross-currents are enough to make traders’ heads spin – which is why so many are now watching the technicals so carefully.
Technical outlook for the greenback
Technicians are currently calling for some more downside to occur in the greenback in the short-term – perhaps taking the DXY down to 80.71 from 82.03 currently. Once the DXY establishes a low in the short-term, technicians are forecasting a very sizeable rally in the DXY which will likely create new multi-year highs and may test the 6/2010 peak at 88.71. That would seem to make sense as those same technicians are calling for only a bit more upside in the euro and Yen before longer-term downtrend resume for each of them.
So, translating from technical to fundamental to wrap things up – the Fed may succeed in keeping rates under their desired level for a bit longer, but (if the technical crowd is correct in their forecasts) they may lose control of rates and the US Dollar starting at some point pretty soon. Technicians say that this outlook will be invalidated by a close below 80.71 – so traders would be wise to earmark that level when constructing their investing / trading plans.