USD/ DXY: GDP PRINT IS PIVOTAL FOR MEDIUM-TERM SENTIMENT
USD/ DXY:
1. In the past, 7/9 days DXY has lost a considerable amount, from 97 to 94 as US data, starting with a big GDP miss, has continued to be poor across the board with all but employment not hitting the target.
2. Fed Minutes of July that we saw this week reaffirmed the need for firmer data before any rate hike will happen with several members wanting to be more confident that underlying inflation is actually growing and the whole group said they deemed data being in-line is vital for a future hike - despite some members wanting to hike soon.
3. This data dependency clause leaves the USD in a medium-term trap, especially given election year and US equitites are unlikely to give much support through september.
Future direction:
1. Durables/ GDP - Imo the direction of the USD up until the Fed meeting in september will be decided by the data we see next week - if Durables and GDP miss the already low expectations US Fed funds will sell-off from their already low 3.5bps/ p14% of pricing and drag the USD lower with it - to 90 at least.
2. Fed Chair Yellen - Many are citing fed Yellens speech next week as a key risk event for the USD however past providing some bif support for the USD, theres not much more she can say that hasnt already been said several times last week by other hawkish Fed members that has already been priced.
- In order for her to provide any level of last DXY support she would have to say for example - "I am hiking in september" or otherwise commit to moving the rate higher - though this is unlikely at probably less than 1/100.
- Thus the risk in fact are actually skewed to the downside for the USD/ DXY, given Yellens usual neutral stance at best, and inability to jawbone the DXY higher for long regardless of whats said; thus there is a higher probability that she is actually dovish - given the recent data spat, an unbiased chair would mention the poor recent data (which other feds have avoided like the plague and instead only commented on the labor market which is doing well). Though on the data front it must be argued that there is a skew to the upside given the bar is set so low at 1.2% - a level pretty hard to miss, though given the inflation, PPI and retail sales data, if there ever was going to be a miss it would be now (durables the day before may indicate the key, a big miss there and GDP will likely follow).
Trading strategy - Short USD vs NZD or AUD; Buying USD on dips vs GBP or JPY to hedge:
1. Given the downside bias already visible in DXY (and the ever looming US election risk), and the technical confirmations of medium-term selling is being backed up with me hearing that USD longs as a consensus trade has faded with insto's and HY/ carry currencies now the target (EM or AUD/NZD) - it makes sense to want to be a seller of USD vs buying kiwi and aussie on dips, especially given their employment report/ monpol outlook is bullish and not much other information is due out for the antipodes in the next 2wks so little should stand in their way.
- Though Fed Yellen speaks towards the start of the week so any USD strength is likely to come then, so it is best to wait for her to speak before adding longs
- also the most important GDP/ Durables data isnt until thu/fri so in actual fact I will remain on the sideline until friday afternoon to place any trades as if USD data is good it is likely to firm USD somewhat given the amount of room selling has given us to move higher without prejudice.
2. Also I suggest adding GBPUSD shorts on rallies into 1.315-32 and USDJPY shorts into 101 on USD weakness as this trade never goes too far wrong and can hedge can short USD exposure you may have, plus the $Yen short provides risk-off shift coverge which is likely to happen in the next few weeks and take us to 96/4 anyway.
1. In the past, 7/9 days DXY has lost a considerable amount, from 97 to 94 as US data, starting with a big GDP miss, has continued to be poor across the board with all but employment not hitting the target.
2. Fed Minutes of July that we saw this week reaffirmed the need for firmer data before any rate hike will happen with several members wanting to be more confident that underlying inflation is actually growing and the whole group said they deemed data being in-line is vital for a future hike - despite some members wanting to hike soon.
3. This data dependency clause leaves the USD in a medium-term trap, especially given election year and US equitites are unlikely to give much support through september.
Future direction:
1. Durables/ GDP - Imo the direction of the USD up until the Fed meeting in september will be decided by the data we see next week - if Durables and GDP miss the already low expectations US Fed funds will sell-off from their already low 3.5bps/ p14% of pricing and drag the USD lower with it - to 90 at least.
2. Fed Chair Yellen - Many are citing fed Yellens speech next week as a key risk event for the USD however past providing some bif support for the USD, theres not much more she can say that hasnt already been said several times last week by other hawkish Fed members that has already been priced.
- In order for her to provide any level of last DXY support she would have to say for example - "I am hiking in september" or otherwise commit to moving the rate higher - though this is unlikely at probably less than 1/100.
- Thus the risk in fact are actually skewed to the downside for the USD/ DXY, given Yellens usual neutral stance at best, and inability to jawbone the DXY higher for long regardless of whats said; thus there is a higher probability that she is actually dovish - given the recent data spat, an unbiased chair would mention the poor recent data (which other feds have avoided like the plague and instead only commented on the labor market which is doing well). Though on the data front it must be argued that there is a skew to the upside given the bar is set so low at 1.2% - a level pretty hard to miss, though given the inflation, PPI and retail sales data, if there ever was going to be a miss it would be now (durables the day before may indicate the key, a big miss there and GDP will likely follow).
Trading strategy - Short USD vs NZD or AUD; Buying USD on dips vs GBP or JPY to hedge:
1. Given the downside bias already visible in DXY (and the ever looming US election risk), and the technical confirmations of medium-term selling is being backed up with me hearing that USD longs as a consensus trade has faded with insto's and HY/ carry currencies now the target (EM or AUD/NZD) - it makes sense to want to be a seller of USD vs buying kiwi and aussie on dips, especially given their employment report/ monpol outlook is bullish and not much other information is due out for the antipodes in the next 2wks so little should stand in their way.
- Though Fed Yellen speaks towards the start of the week so any USD strength is likely to come then, so it is best to wait for her to speak before adding longs
- also the most important GDP/ Durables data isnt until thu/fri so in actual fact I will remain on the sideline until friday afternoon to place any trades as if USD data is good it is likely to firm USD somewhat given the amount of room selling has given us to move higher without prejudice.
2. Also I suggest adding GBPUSD shorts on rallies into 1.315-32 and USDJPY shorts into 101 on USD weakness as this trade never goes too far wrong and can hedge can short USD exposure you may have, plus the $Yen short provides risk-off shift coverge which is likely to happen in the next few weeks and take us to 96/4 anyway.
