As we move into the second quarter of the year, we need to look at the trends that are likely to feed it by reviewing the past quarter’s work.
One currency that was perceived to have had a strong first quarter was that of the USD basket, which march higher after a year of pressure in 2020.
Interestingly enough, the Q1 performance of the basket was actually only modest up just 2%. To put that into further context the USD fell 9% in the second half of 2020, so it is still a long way from recapturing its former highs.
Considering the incredible rise in long term US treasury yields in the first quarter and the rapidly increasing growth expectations compared to the rest of the developed world a 2% rise in the basket is rather insipid.
But there is good reason for this overall ‘underperformance’.
First, we should point out that pairs are clear in differing cycles, USD/JPY for example has had an incredible quarter almost purely on the US treasury trade. It is one pair we continue to see as holding to its first quarter trend, up near enough to 7.5% to March 31.
With US treasury yield likely to further steepen over the coming quarter the fundamentals give us a range in the pair of ¥107 to ¥114 and are looking to buy dips when it approaches the bottom end of this range.
The same story is presenting in EUR/USD which fell over 5% in the first quarter as it’s ‘funding source’ tag allowed solid borrowings for US treasuries but also due to Europe’s continued struggles with COVID and its poor vaccine roll outs.
The downtrend is likely to be sustained in Q2 as Europe’s troubles persist. The fundamentals coupled with technicals give a range of $1.14 to $1.21 and again if we see rallies pushing the pair to the top-end of this range we will be looking to sell, particularly if it approaches the $1.20 handle.
But back to the DXY – Part of the reason for the tepid DXY trade is likely down to the Federal Reserve trying to quash US rate hike expectations through to 2023. In both Fed meetings during the quarter, it was at pains to point out that no matter how hard the US economy runs in the near term it will not shift its policy stance. This idea could very much be challenged in Q2 as further positive data puts upside pressure on the USD that are clearly still at low levels compared to the second half of last year.
Watch for range bound pairs to signs a possible break out in the USD. AUD/USD and NZD/USD have been stuck in 2 cent ranges of late. GBP/USD has also slowed down. Any signs of a grouped break down in pairs will suggest the Fed is losing out to the data.