Highlights:
- Fed may add to DXY losses on Wednesday announcement, HFs hold biggest net short in 4 Yrs
- AUD/USD removed from top spot after RBA’s Debelle says neutral rate not predictive
- EUR approaches 1.17 with the wind in its sails
- Oil weakness persists on reports that supply from OPEC is above production curb agreement
- Sentiment Highlight: EUR/GBP may be loading up for a move higher
2017 is a great year for risk as it seems equity traders see no need for a sell button, but the same can’t be said for the USD. Developed market FX has been having a field day with USD over the session and today’s drop brings the total loss for 2017 for the DXY to 10%. The key technical support many are now watching is the 2016 low near 92. Much of the weakness due to the 57.6% weighting of the EUR in the DXY is the impressive EUR strength. Whatever the reason, the pressure is likely to remain. Per the CFTC, institutional speculators (hedge funds) are holding their largest net short position in the Dollar Index since 2013 before the Taper Tantrum erupted and Bernanke put the pacifier back in the market’s mouth.
One way that many traders were playing USD weakness was via the AUD, which was trading at 2-year highs earlier in the week. On Friday morning, RBA’s Guy Debelle took some enthusiasm out of the trade by saying the revelation in the RBA minutes this week that the neutral rate has shifted higher is not predictive of a future rate increase. On that announcement, AU sovereign bonds went bid falling ~4%, and the AUD was sold across the board. However, looking at the macro picture, risk-on currencies like the commodity bloc and EMFX still appear a favorable way to play USD weakness.
Outlier strength in the FX market can be infectious, and that’s how it feels for EUR at the moment. As EUR/USD looks set to test 1.17, and approach the 2015 high of 1.1714, EUR bullishness is showing up across the map. The political picture in Europe is the least concerning of the G4 (US, JP, UK, EU) at the moment as inflation is picking up the pace, though still too low to remove accommodation for the ECB.
Looking across G4 pairs, EUR/GBP continues to look favorable to the upside when comparing positioning, options, and the uncertainty in the economy for the UK. Thursday showed two central banks in the ECB and BoJ that could not have been further apart in how they plan to conduct monetary policy over the coming year, which is bullish EUR/JPY. Finally, in a similar mess that GBP finds itself in, the political risk premium is also being applied to USD with its own slate of weak data, which opens up the possibility of a less-hawkish Fed moving forward that could keep EUR/USD pushing higher yet.
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On Friday morning, a discouraging report from Petro-Logistics showed OPEC output appears set to rise above the levels agreed upon in the agreement. The report showed OPEC output is likely to be above 33m barrels per day July, which is higher than the agreed upon group target of 32.5m barrels that was agreed upon when they agreed to extend the production cap in May. When looking at the chart below, you can see that another lower-high may be in store, which would be a favorable environment for a trend continuation lower.
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FX Closing Bell Top Chart: July 21, Oil loses ground at key resistance
Chart Created by Tyler Yell, CMT
Next Week’s Main Event:USD Federal Open Market Committee Rate Decision (Jul 26)
IG Client Sentiment Highlight:EUR/GBP may be loading up for a move higher
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.
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Written by Tyler Yell, CMT, Currency Analyst Trading Instructor for DailyFX.com
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