US Dollar Fate Not In US Hands As Data Focus Shifts To ECB And BoJ


Highlights:

  • Dollar rebound in heavy doubt per futures markets betting on Fed action
  • AUD at technical tipping point as CFTC shows longs pile in
  • Crude Oil finds resistance as OPEC compliance on cuts drop
  • Sentiment Highlight: Bullish AUD/USD as retail short positions increase 47.1% WoW

What is a Dollar Bull to do in the current environment? While Janet Yellen did tell Congress last week that inflations course from here is uncertain, the Fed will continue to focus on raising rates. As I’ve shared in my Closing Bell webinars, this almost completely is due to a dual-focus of the balance sheet run off and financial conditions.

The Fed has mentioned that they want to be able to assist the economy by cutting rates if the business cycle crests as the Fed is unwinding their balance sheet (they’ve mentioned they do not want to stop once they start as it could sting the economy). Also, financial conditions are easier now when measured by the Chicago Fed National Financial Conditions Index (NFCI) since the summer of 2014. Per the NFCI, the Fed is essentially getting free-hikes in much the same manner that Alan Greenspan did as financial conditions remain easy despite a “tightening” Fed. However, despite the tightening, the dollar remains weak, and recent CFTC positioning shows leveraged funds have the largest net short USD trade since 2014. Maybe there is something to financial conditions after all.

Either way, the bond market is not buying what the Fed is selling. The Eurodollar futures market is pricing in a little over one hike in 2018 while the Fed is stating they’ll provide three. If easy conditions remain per the NFCI, the Fed could hold true. However, it’s also possible that if conditions tighten, the Fed could begin to get out-hiked in 2018 by rival central banks.

Next, going to Australia, the Australian Dollar is on the cusp of a breakout that is being watched attentively as Copper and other Base metals ride the wave of Chinese output. In the options space, AUD/USD implied volatility over the coming month is near the highest level in 30-days. Copper is trading at the highest level in 4-months on Chinese data. Monday’s high on AUD/USD of 0.7838 broke above the 2016 high and aligns with the sentiment picture below that further gains could be seen. This week, Australia will look to add momentum to last month’s impressive jobs number and if it’s able to do so, the hedge funds per the CFTC that are holding a large net-long position will be rewarded and will likely add given the lack of abundant breakouts and trading opportunities in the current environment.

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Looking to Crude Oil, Bulls would likely do well to curb their enthusiasm. While positioning does show that institutional short positions unwound the most in four weeks, production in OPEC is up showing the compliance is dropping. On a positive note, the Contango in WTI for Dec.17-Dec.18 has narrowed the most in nearly two weeks, which combines with positioning to support the pull back. However, there remains a mountain of resistance that Crude would need to break through for an even Bullish picture to emerge.

Recommended: Crude Oil Rises Into 55-DMA On 5% Weekly Gain, Production Rises

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Closing Bell’s Top Chart: July 17, 2017, US Oil rallies into resistance, can Bulls push it higher?

US Dollar Fate Not In US Hands As Data Focus Shifts To ECB And BoJ

Chart Created by Tyler Yell, CMT

Tomorrow’s Main Event:GBP Consumer Price Index (YoY) (JUN)

IG Client Sentiment Highlight:Bullish AUD/USD as retail short positions increase 47.1% WoW

The sentiment highlight section is designed to help you see how DailyFX utilizes the insights derived from IG Client Sentiment, and how client positioning can lead to trade ideas. If you have any questions on this indicator, you are welcome to reach out to the author of this article with questions at tyell@dailyfx.com.

US Dollar Fate Not In US Hands As Data Focus Shifts To ECB And BoJ

AUDUSD: Retail trader data shows 24.6% of traders are net-long with the ratio of traders short to long at 3.06 to 1. In fact, traders have remained net-short since Jun 04 when AUDUSD traded near 0.74595; price has moved 4.5% higher since then. The number of traders net-long is 23.6% higher than yesterday and 25.8% lower from last week, while the number of traders net-short is 12.1% higher than yesterday and 47.1% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests AUDUSD prices may continue to rise. Positioning is less net-short than yesterday but more net-short from last week. The combination of current sentiment and recent changes gives us a further mixed AUDUSD trading bias. (Emphasis mine)

Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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