Article / 11 May 2016 at 9:05 GMT

From the Floor: US dollar rally stops short

Consulting editor / TradingFloor
Norway
  • USD rally fails to break key levels vs EUR and JPY
  • NZD jumps on central bank inaction
  • Agricultural commodities, including soybeans and coffee, surge
  • Crude oil stuck between supply outages and rising inventories
  • Bond market sighs with relief as Greece and creditors on the verge of a deal
From the Floor Banner
 
By John Acher

The US dollar's rally has stopped short of a full reversal, and major USD pairs could be set to test lower again in a week largely barren of key economic data.

Meanwhile, agricultural commodities have surged on the back of a bullish world supply-and-demand report, while crude oil has got stuck between supply disruptions and rising inventories.

The key for the US dollar broadly is in USDJPY and EURUSD, where important technical levels remained unbroken, says Saxo Bank's head of FX strategy John J Hardy.

“1.1370 was poked at yesterday in EURUSD, [but] it survived. We almost rose to 109.50, which is the key Fibonacci retracement and I would call the upside swing level in USDJPY – that also failed to get taken out, and we've come back lower again,” Hardy says. 

 USDJPY - Key Fibos not threatened. Downside threat if risk appetite slides/BoJ fails to warn
USDJPY
Source: Saxo Bank

“So the dollar recovery has stopped short of a full reversal, and those two key dollar pairs remain unbroken in terms of the dollar downtrend,” Hardy says. "So still waiting for resolution, and it could mean we are testing lower in fact.” 

Hardy says he would "cook up" a USDJPY put idea on potential for some Friday disappointment in the market looking for interesting signals from the Bank of Japan and/or FOMC voters out speaking on Friday. (See Hardy's new USDJPY put option for test of cycle low)

"As long as that [USDJPY 109.50] resistance is in place, the focus could be lower for a retest of the lows for the cycle," Hardy says.

“So that's the scenario there – we see a test of lows in USDJPY, and one final leg lower possibly below that before we get an official response somewhere over the summer,” Hardy says.

"EURUSD as well – we're going to have a hard time getting a trend going in any direction until we get this Brexit referendum out of the way," he says.

Kiwi jumps

The New Zealand dollar was volatile, but one of the best-performing Asia-Pacific currencies on Wednesday, after the Reserve Bank of New Zealand's financial stability report.

The markets had speculated that the RBNZ would unveil some new macro measures to control housing inflation, which was expected to give the bank more leeway to lower rates, says Saxo Bank trader Lakshmi Thurai in Singapore.

“But instead today the semi-annual financial stability report stated that there are imbalances in the property sector, they are on the rise, and the central bank would watch it closely, but it did not produce any steps, no decisions, no timing, and that sent the kiwi sharply higher,” Thurai says.

 NZDUSD - Looking to fade rallies from here
NZDUSD
Source: Saxo Bank

Hardy agrees with Thurai's view that the markets were probably pricing in that they the RBNZ would do something. "But all they did was send a warning,” Hardy says.  

“I think kiwi-dollar remains a sell on rallies,” Hardy says, adding that the channel in NZDUSD appears to have broken down. 

“We may see some attempts back towards the 0.69 area, but I would fade any rallies even from these levels. Again with kiwi, you can see how jerky and choppy the chart is (see above), so you need to keep the stops rather wide on those trades,” Hardy says. 

The focus in the FX markets shifts to a Norwegian central bank interest rate decision and the Bank of England's inflation report on Thursday. 

Mixed Asian markets

Asian equity and currency markets were mixed on Wednesday.

“Overnight we saw some big moves on Wall Street that we haven't seen in weeks actually," Saxo's Thurai says. "That sentiment definitely overflowed here to Asia in the morning, but fizzled throughout the day."

The Nikkei started out strongly with a rally of more than 1%, but retreated Wednesday afternoon and some yen buyers re-emerged, and the yen strengthened about half a percent, with USDJPY falling as much as 70 pips, Thurai says.

The Australian S&P/ASX 200 index hit a nine-month high above 5,400 points, but then retreated as Moody's warned about Australian banks.

That also affected the Aussie dollar, which initially hit a high of 0.7390 after a favourable consumer sentiment measure, but then AUDUSD came off those highs abruptly after Moody's said major Australian banks face increased challenges in the rest of 2016 due to weakening asset quality and a slowdown in earnings growth, Thurai says.

Crude oil stuck in the middle

Crude oil prices are caught between rising inventories and supply disruptions.

“[US oil] inventories are expected to rise again today – that's another counter-seasonal rise,” says Saxo Bank's commodities strategy chief Ole Hansen, referring to the US Energy Information Administration inventory report due later on Wednesday. 

“We are a second week into what was falling supplies last year, so that is obviously bearish for the market,” Hansen says. 

But supply disruptions in Canada and Nigeria, including Shell's evacuation of its facility at an oilfield in the Niger Delta, are supporting oil prices. 

Up on the farm

Tuesday saw plenty of movements in the commodities space yesterday, not least in the agricultural sector.

“It was a bit of a shock on soybeans” says Hansen.

The World Agricultural Supply and Demand report showed a big reduction in expected soybean stocks, which prompted a 5% surge in soybean prices to the daily limit and an 18-month high, Hansen says.

Corn and wheat prices followed the rally in the farm commodities complex as a whole, even though the wheat outlook in the WASDE report was bearish, Hansen says. 

“These numbers have to be supported by drought in the US to stick,” Hansen says. “So there is some uncertainty now about whether this rally will hold, and soybeans could be a shorting candidate pretty soon, so we'll keep a close eye on that.” 

Coffee surged to a six-month high, especially London coffee, Hansen says. “Robusta is hurt by drought in Vietnam, and in Brazil it has also been rising because the real has strengthened a bit.

“So coffee is on the move once again, [and] basically the agricultural sector showing some strong returns yesterday,” Hansen says.

Greek relief rally

In the fixed-income markets, markets breathed a sigh of relief as Greece and its creditors are reported to be close to agreeing on a deal that could include debt relief.

“Greek bonds rallied quite significantly yesterday,” says Saxo Bank's fixed-income trader Michael Boye. “It seems we won't have to go through another summer like last summer with all the last-minute deals [with Greece].” 

But the issuance of new sovereign debt in the Eurozone is showing no sign of drying up either, as Italy is now set to issue new 50-year bonds, Boye says.


Soybeans field
 
Soybean prices surged on the back of a bullish new world agricultural 
supply-and-demand report. Photo: iStock

John Acher is consulting editor at TradingFloor.com

Editor’s note: From the Floor takes advantage of TradingFloor.com's unique real-time access to Saxo Bank’s various trading desks around the globe to put our community in touch with the developments that matter to their portfolios.

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