Is A Dollar Rally In The Making?
Despite solid jobs data
on Friday, it simply was not enough to maintain the dollar’s recent
move higher. Most traders were betting on a +300K reading, and at +262, above
consensus, it simply was not what the market had prices in. The dollar was
quickly sold off bring it right back into a key support area at 82.35-50. While
we were disappointed by the reaction and closed some trades in order to protect
minor gains, we are not ready to throw in the towel just yet on the dollar,
mainly due to the technical picture, although it is yet again in a fragile
state.
Some recent empirical evidence we have read
suggests that macro-plays are edging out the more “rapid fire” trading approach
in the FX arena. If this were to hold going forward, it is hard to ignore the
very real possibility of the dollar moving higher in the days and weeks ahead.
Consider the text and graphic below from BCA Research.
“Today’s respectable
U.S. non-farm payroll data for the month of February will harden the Federal
Reserve’s resolve to raise interest rates, which is bullish for the dollar. The
trend towards stronger U.S. job growth will continue in coming months, which
implies more Fed rate hikes. The Help Wanted Ads Index continues to rise, which
is a bullish sign for job creation in the
U.S.”
What about the current account and trade deficits
you might ask? Australia and New Zealand have higher twin deficits than does
the US. Nonetheless, it boils down to what we had mentioned earlier in the
year, the market will determine the fate of the dollar based on what it decides
to focus on, be it deficits or interest rate differentials. If it chooses the
latter, it is hard to see the dollar falling from here.
Sticking with the macro based theme, our current
favorite ideas (longer-term), although flat on them currently awaiting better
entry points are the following:
Short EUR/JPY:Â
Euro is overvalued versus the JPY be nearly 30%, economy in Japan is beginning
to perform more robustly
Short EUR/GBP:Â
purely a play on rate differentials and a relatively more robust economy in the
UK.
Short CAD/JPY:Â
we see unwanted strength in the Canadian dollar due to its impact on exports as
well as relative economic conditions as the main driver for this cross to trade
lower moving forward.
As always, feel free to send me your comments and
questions.