Another Sign Of USD Exhaustion
Over the last 24 hours, we have seen some strong USD buying again, taking some of the key pairings back towards their recent lows. Moves have since faded again, and this may be in part due to the inline inflation expectations, where some were anticipating and overshoot on CPI. At 2.9%, the annualised rate is high enough as it is, and indeed may rise in a more inconvenient and growth unfriendly manner, given retaliatory tariffs could feed through.
This is not the market's concern at the moment, rather which is the best currency in the pack, and the USD stands out on yield differentials alone. Risk aversion amid the trade wars we are currently in would traditionally have hit the likes of the JPY and CHF, while the EUR has lost its safe haven status due to internal political troubles stemming from the funding and immigration issues raised by the new Italian government.
AUD, NZD and CAD have naturally suffered as risk assets with the latter further hampered by the stagnation in NAFTA talks which may be set to resume according to US officials speaking on the wires today. Nevertheless, USD/CAD hit strong resistance above 1.3200 yesterday again failed to push above here this morning, despite yet more strong buying in the mid 1.3000's. This right after the BoC had hiked rates by 25bps. AUD/USD buyers are waiting in the low 0.7300's and similarly ahead of 0.6700 in NZD/USD and this all points to a period of consolidation in the USD pairings until we get the next round of US data.
Later on this evening we get the Federal Budget balance as at June, and while this may not really impact on the USD immediately, it could unnerve those looking at how quick the government is reading to spend given the deficit running at the worrying levels it is.
Overall, we continue to see a lack of upside progress turning into a possible washout of USD longs, with every dip being bought up. Exposure is a necessary consideration at these extremes, and tomorrow's CFTC report will again make for interesting reading.