Morning Commentary: Whipsaw City

Foreign Exchange - Morning Commentary

Whipsaw City

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
I was away for two days but in following the markets from home and arriving today, I cannot help but be reminded of how quickly sentiment and price action can shift from bullish to bearish regarding the U.S. dollar (DXY). This has been a feature of the market now for quite a while; just about the time that all hope is lost or when investors become the most optimistic, price action runs out of momentum and a course reversal is about to take place.
The DXY has now fallen for four straight days. In the previous cycle, it rose in six of seven trading sessions. In the previous cycle before that, it fell in seven of the nine trading sessions. You get the point! Since October of last year, the DXY index has traded in a narrow range largely between 95.00 and 97.75. At some point, there will be a breakout, but it does not appear to be close at hand.
The DXY index being trapped does not imply that individual currencies have not been on secular bullish or bearish trends. Each individual currency has its own set of dynamic metrics that can be more sensitive to domestic economic data, interest rates, commodity prices, or equity movements. We continue to recommend that importers and exporters be proactive about managing their requirements; this is a time to be more tactical, be less strategic and take what the market offers you in terms of opportunities and price action.
  • Yesterday, we pointed out that there has been a sharp spike higher in the volatility associated with the British pound (GBP) surrounding the three votes in Parliament this week.  Late yesterday, PM Theresa May's modified Brexit deal went down to defeat again (smaller than the first defeat in January), but this was expected. More votes are scheduled for today and tomorrow with the market pricing in a request for an extension past the March 29 deadline. With lots of volatility and price action, the market believes that a soft Brexit is still the ultimate conclusion and seems to believe a stronger GBP could be in order.
  • U.S. Durable Goods Orders for January came in stronger than forecast at 0.4% against expectations of a decline of 0.4%. Ex-transportation, Durable Goods Orders fell by 0.1% but Non-defense rose more than expected, up by 0.8%. PPI for February remained benign at 0.1% dropping the YoY rate from 2.0% to 1.9%. U.S. interest rates are up slightly on the session.
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