We have been a strong on our positioning in the USD over the past months particularly in the risk-sensitive pairs. You only have to look at the performance of the USD against AUD, NZD, CAD and Scandinavians to see the true picture of FX flows over the past 4 months.
However as with anything FX trading, we must constantly review and with the USD at four-month highs now is as good a time as any to do so.
We have been strong in our views about this pair, no Aussie data was moving the dial to the upside here and we have seen it hit an 8-month low of $0.7290 last week. What caught our attention at the end of the week was the quick recovery and the bounce out of the $0.72 handle. The pair has been holding in a trading range between $0.732 and $0.738 since. Fundamentals still suggest that trading in the interim will be shorting. But, it looks to moderating and some will begin to see value. Remember the AUD/USD hit $0.7799 only 5 weeks ago. Barring New South Wales lockdowns are going to unwound, and activity will return.
Interesting pair considering how oil has performed over the past 5 week. USD/CAD hit $1.27 a 5-month high last week but did moderate back into $1.257. However, the risk in the CAD has seen traders move back to the USD after an almost uninterrupted 10-month buying spree which saw USD/CAD falling from $1.35 to a low of $1.203 in May. This pair maybe slightly different from peers but again hitting $1.27 may be a resistance level to much for the USD to punch through.
Even more eye catching is the NZD/USD pair, which despite facing a strong chance of a RBNZ rate hike in August has not been able to build a case against the USD. The fall from $0.732 in May to a low of $0.688 last week despite the RBNZ’s meeting does confirm our USD thesis. However again like its trans-Tasman recaptured its lower band in the $0.69 handle. It is a long way from the May levels and the USD is driving everything in this pair but will present with value soon enough.
EUR/USD dipped to $1.1752 a new four-month low but has since recovered to $1.1795. Now although this isn’t as risk sensitive as the pairs above it is a long way from the May figures of $1.216. There are technical signs of fatigue here too but nothing that screams full reversal. Watching this pair closely.
So has the USD peak? US data is still the key driver FX in our opinion. Their recovery out of the COVID crisis has been astounding and we will continue to back this. However, the US bond market is priced for some volatility and this 4 months of near enough to, uninterrupted buying of the USD will slow as profit is taken off the table.
Keep reviewing your positions.