The reopening of the US and European economies is gain pace, which has been the biggest driver of the of the USD over the past 5 months.
However, in the last 14 days that momentum has slowed and was a trigger for us to review positions and trade idea. The unbroken run was fatigued as seen in MACDs and RSI and we moved accordingly.
There is another point that we believe is starting to filter into FX positioning – the Delta Strain. More and more economists are growing weary of rising cases on both sides of the Atlantic. Positively it’s not seeing increases in deaths, thanks to vaccines but it is slowing output.
Take last week’s US private sector payrolls (ADP) which disappoint at +330,000 in July. The expectation was for 690,000 jobs to be created. This is the first real sign a slowing US labour market since March.
The counter to this was the ISM service PMIs rising from 60.1 to 64.1 in July a record all time high led by the “exports” and “prices paid” with employment also performing well.
If we throw in comments by Federal Reserve Vice-Chair Richard Clarida, a known hawk. It appears to back the ISM read. The main comments that FX noted were:
- “Policy normalisation in 2023 would be entirely consistent with the new policy framework” …
- “That conditions for raising rates could be met by the end of 2022, with a tapering announcement possible later this year.”
- That the US will see a “healthy job gains in the third quarter.”
- Believes “inflation risk to the upside” but “supports the official view that the current overshoot is transitory.”
But then counted all this stating he was: “surprised by the fall in treasury yields and believes this reflects virus risks that are building.”
Its weariness has filtered into mayor pairs, just look at EUR/USD which traded up to a three week of $1.1902, a full 2 cents up from where it was at the start of July. It has since slipped back to $1.1833 but that USD strength has eased.
Then there is USD/JPY which fell to a 2-month low of ¥108.72 before tracing the moves in the treasuries to move back up to ¥109.45.
AUD/USD moved back into $0.74 with a read of $0.7427, it did slide on the ISM data to $0.7370, but as we write its pushing $0.74 again being $0.7390.
Trading Delta will be the next fundamental of the COVID trading world.