FX Update: USD consolidation reaching pivotal levels

USD: consolidation reaching pivotal levels
The US dollar has managed to pull higher still since the weak close on Wall Street on Friday, with sentiment still a bit edgy ahead of this Wednesday’s Biden inauguration and despite a near total lack of unrest across the US at the weekend after warnings were loudly trumpeted from official quarters. Supposedly, we should also be concerned for protests on Inauguration Day itself, but the hopeful view for public order is that the Capitol Hill riots were a one-off, down to the presence of a gaggle of the most extreme Trump supporters and a mob mentality excited by a number of fiery speeches from Trump and others that goaded them on.

Assuming an orderly transition, there are still a number of burning questions looming as Biden takes office, from whether and how quickly his administration can do anything about the vaccination effort and winning the race against hyper-contagious Covid strains, to the temperature in Congress (most importantly among a key handful of senators) on stimulus checks and other stimulus measures, as well as more specific, one-off issues like the Keystone pipeline, which could heavily impact USDCAD if cancelled (more below). I will also be keeping a close in eye in the first weeks of the new administration on signals from the Biden administration on China and on Russia, where sanctions are a looming threat after accusation that Russia is behind a recent cyber-attack of US government agencies and as the Democrats still claim Russian interference in the 2016 election. There is also the issue of the detention of opposition leader Navalny, who returned to Russia at the weekend. The outgoing Trump administration has also moved rather aggressively against China on a number of fronts and the market may be taken aback if the Biden administration doesn’t soften its stance (due to a domestic audience) against positions that the Republicans have now staked out on Chinese companies and listings on US exchanges, among other issues.

While we await all of this incoming information, the USD consolidation has reached reasonable, consolidation levels without yet breaking anything. And while full trend reversal levels remain some ways off, further USD strength in the near term begins to stress the USD bearish case. One thing that is most concerning for the risk of a more profound USD rally here is one of positioning. As I noted in this morning’s Saxo Market Call podcast, the fact that EURUSD speculative long positioning never reached a new high despite the new highs in EURUSD is some cause for concern – i.e., less participation at higher levels. This kind of divergence has marked a major market turn in the past. Still – too early to tell. I suspect that any more large-scale USD rally would most likely be on a partial position unwind due to a more significant setback in risk sentiment than we have seen in a long while after the remarkable post-pandemic breakout blitz of bullishness in response to the liquidity tsunami.

Today is a US national holiday (Martin Luther King, Jr. Day), so the action is likely to slow later today as US markets will be off-line.

US Treasury Secretary nominee Janet Yellen set to testify tomorrow. The former Fed Chair is set to testify in a nomination hearing tomorrow and people close to her say she will express a belief in a market-determined dollar level (and explicitly not in favour of a weaker US dollar for competitive advantage). Supporting a strong, or at least stable, dollar has been the role of the US Treasury Secretary for decades now, since Clinton's Treasury Secretary Robert Rubin at least, even under Trump’s Secretary of Treasury Mnuchin when Trump was often railing against the Fed and USD strength.For Yellen specifically, USD support is doubly ironic as she was a very dovish Fed chair and was at the helm of the Fed during the famous pivot in Fed guidance in early 2016 to delay hiking rates after a period of brutal US dollar strength.

Chart: EURUSD
EURUSD has tumbled down to its first major support level, the 38.2% retracement of the entire rally wave from the November lows – a reasonable level for the bulls to re-establish positions. Looking lower, if this consolidation continues, the psychological and de facto support area around 1.2000 is the next key pivot zone, with the 1.1900 area and nominal 61.8% Fibo level below that the near-term existential level for the USD bears in this pair, because if the pair trades below there, a more profound breakdown and setback for the USD bears could threaten.