FX Update: The USD is breaking down again

FX Trading focus: USD is breaking down

The US dollar is breaking down again as we work deeper into the European session today, a development that comes after a week of very strong US data failing to excite renewed selling of US treasuries (and therefore higher yields), which was always the key support for the US dollar in its run higher since basing at the very beginning of this year. A very strong session for Chinese equities in Asia overnight after an ugly period of weak sentiment has also likely provided a bit of extra energy into the mix for renewed USD bears, as Chinese regulators have weighed in on what the market has perceive as support for the troubled Huarong Asset Management Company.

So EURUSD has pulled above 1.2000, the G10 smalls are outperforming as EURNOK has broken below 10.00 again even without a new cycle high in crude oil, although last week’s smart rally helped. As long as the US treasury threat remains neutralized, we could be set for a significant move lower here in the US dollar, at least a test of the lows. Forward concerns remain, of course – for example how the quickly the stimulus sugar rush fades, whether a credit cycle continues to fail to ignite in the US (note WSJ article: Americans Are Spending, Not Borrowing. That’s a Problem for Banks ($) ). And of course, there is also the pandemic itself, where the global 7-day average case count just rose to its highest ever, with the case count exploding particularly in India, where a new “double mutant” version of the virus has been reported.

So if today’s break lower in the USD is sustained, I am sympathetic with a solid leg lower, to perhaps 1.2300 in EURUSD and a test above 0.8000 in AUDUSD. But to get higher for these pairs and lower for the USD, we may need a better sense that China is shifting on its attitude on stimulus.

Chart: EURUSD
EURUSD has spilled over 1.2000 again as the big round number failed to offer much resistance. This opens up the full extent to the 1.2350 area top, assuming the market remains on a relatively hopeful footing here, as the market prices back in reflationary outcomes and a relative improvement in the outlook for the rest of the world ex-US, after the market so loudly ignored super-strength US data in recent weeks, particularly last week. We could even be set for a challenge of the early 2018 highs above 1.2500, a scenario that might require a bit more support from China in the form of signs that it is easing up on its tighter policy stance.