The Trade Week Ahead – DXY Me This

Australia Day on Friday will see the ASX closed for the day – however cash markets around the region are trading so although it is a short week for us locally there is plenty still going on globally.

The only notable piece of data from Australia is Westpac’s leading index which cobles together a range of indicators, markets and indices into one index these include: local market, dwelling approvals, US industrial production, the commodities price index as well as the yield spread of the 10-year to 90-day BBSW. It’s been expanding for the past three months and considering the movements in markets – December should see it registering fourth month of expansion. It can have a slight impact on the AUD however in the main is global data that should catch your attention

Therefore, the macro fix this week is coming from the US and Europe. There is certainly plenty to discuss particularly ECB’s first meeting of 2018 plus the US is releasing its fourth quarter GDP although only a preliminary read – all the signs are pointing to a solid finish to the year in the US, however the USD may look through this as the lead in point to the data this week is the current trade in the US Dollar Basket or DXY.

(Source: IRESS)

One needs to go back to 2014 to see the DXY at 90 it is under enormous pressure – and there is clearly free air on the support side.

The reasoning for the decline in the USD is down to the following factors:

• The growth in other economies
• Decreasing probabilities of rate rises in the US versus the increased probability of rate rises by other central banks
• US bond market rout
The real driver of the DXY has been the EUR and JPY both of which have been catching bids heavily in the past 6 to 8 weeks – the JPY due to increased risks in the US bond market the EUR however is a more interesting story.

First point was the minutes from the December ECB meeting. The release alluded to the prospect of a better economic outlook and that the possibility of raising rates in the area was not out of the question.

The caveat was that certain market events would have to occur first to allow the Bank to consider move in its three main interest rates. Last week saw one of those market events beginning to materialise – inflation. Core CPI in the EU rose 1.1% year-on-year to December and increased to 0.5% month-on-month.

Europe forecasted to have a renaissance in growth this year and should finally break out of the low growth, low inflation, two speed economy it has been shackled with since the GFC and the Euro-crisis of 2012.

This makes Thursday night’s meeting all the more interesting. Further mention of zone growth and a return of normality in the periphery should put further bids into the EUR on the belief that 2018 could see the world’s second largest central bank increasing the interest rate for the first time since 2011 – EURUSD to 1.25 isn’t out of the question if this is mentioned.

EURUSD remains one of the most interesting trading pairs around currently and this week has plenty of spice to add to that view.

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