FX Update: USD selling extends as EURUSD mulls 1.1900 for third time.

Another extension of broad USD weakness into today’s trading has taken the USD to new cycle lows versus the AUD, CAD, CHF and NOK within the G10 currencies and within a pip of new lows versus the EUR, as EURUSD tries above 1.1900 for the third major attempt at that level since the first one some three weeks ago. The USD weakness is helping feed enthusiasm in risk sentiment, it seems, as US megacaps/tech stocks have scraped to new all-time highs and European stocks are even managing to pull higher today despite the strong euro.

Somewhat curiously, the JPY has suddenly come to life and recovered from much of the downside it suffered at the hands of the US dollar recently – chiefly inspired by the strong uptick last week in US yields, a development that has faded over the last few sessions, though it hasn’t faded as strongly as the JPY has rallied. Quite often in recent market cycles, the JPY and USD are correlated in the crosses, so EURJPY and EURUSD are normally highly correlated, so it has been rather interesting to observe the divergence of the last couple of sessions, if it is a bit early to require an explanation. If yields rise again beyond recent highs, we would expect a bounce back in USDJPY and possibly EURUSD to come under downside pressure, though less conviction about any linkage there for now.  

Today we watch and wait on whether the USD is punched down through the next round of supports, particularly 1.1900+ in EURUSD and eventually the 105-104.50 area in USDJPY. Looking ahead, we have the FOMC minutes up tomorrow, but more interesting from the Fed will be the conclusion of their policy review, available soon, and any signals Fed members care to send at what would have been the Jackson Hole symposium but is now merely the video-based Kansas City Fed symposium coming up on August 27-28. Yield curve control, financial repression via digital currencies and letting inflation run hot likely to be high on the agenda, though in the long run, if these policies are a given, it is more about fiscal policy’s willingness to pull out all of the stops to realize the potential implications of these policies.

Chart: USDCHF
USDCHF beat EURUSD to the punch in setting new lows for the cycle for the greenback. It’s been a curious and ponderous sell-off that took a full trading week to retrace from the local range highs back to the new lows. We have highlighted the very stretched positioning in the EURUSD speculative longs (USD short positions) in the US (important as EURUSD and USDCHF are usually closely correlated due to little movement in EURCHF. Though only a fraction of the size, it is worth noting that the CHF long versus the USD in futures positioning is at its highest since 2011.) USD bull holdouts will have to hope that the bullish momentum divergence here (new price lows without a new low in the momentum indicator we show here) is a sign of bearish trend exhaustion, which is only confirmed with a sharp back-up into the range and falsified if momentum continues strongly to new lows for the US dollar. The SNB is likely getting restless as broad CHF measures have only traded at this level of strength or higher during two brief episodes – during the EU sovereign debt crisis for a time back in the summer of 2011 and as the ECB was set to unleash its QE programme and the SNB abandoned the ceiling on the CHF in early 2015.