While we recognized the pace and trajectory of the greenback’s ascent was unsustainable in the short-term, the key issue for market participants now becomes when the stretch of USD profit-taking has run its course, as a period of choppy consolidation materializes with short-term players reassessing the technical landscape. Though the dovish interpretation of last week’s FOMC monetary policy decision has derailed the seemingly unrelenting US dollar bulls, we believe this air pocket for the DXY is an opportunity for medium and long-term corporate hedgers to capitalize. As the key fundamental driver behind the rapid rise in the greenback has been monetary policy divergence between the US and most other high-income countries, regardless of whether the result of last week’s statement is a June or September rate hike and a more ‘patient’ Fed when it comes to subsequent interest rate decisions, the divergence in monetary policy has yet to peak. We continue to believe the upward trajectory of the greenback will be a choppy one, trusting the recent roadblock is more about technical repositioning as opposed to a key reversal. The consolidative pattern has continued today, with the DXY emitting a strong offer tone heading into the new trading week, helping to push EURUSD towards the 1.09 level in early trading.
With the economic news stream being light in Europe to begin the week, focus is squarely on today’s meeting between Merkel and Tsipras in Berlin today. European bourses are skittish heading into the meeting and subsequent press conference, with concerns from investors there is a greater likelihood of a ‘Grexit’ the longer these reform negotiations drag on. Cash-strapped Greece is running out of time to appease its creditors on the reforms they have outlined, with markets skeptical any positive progress will be made today as the DAX has shed close to 1% as we go to print. The doubtful price action in European equities has failed to flow through to either EURUSD or North American equities, as S&P futures are pivoting around the unchanged mark before the opening bell.
The only economic data to note heading into today’s North American session will be Existing Home Sales for the month of February in the United States. Housing starts for February that were reported last week came in on the soft side of expectations, so it wouldn’t be surprising to also see existing sales follow suit and come in with a downside surprise that falls short of the 4.9M annualized reading that is expected. Also on the docket is a speech from Fed Vice Chairman Stanley Fischer, and given it is so soon after last week’s rate decision, the transcript will be closely scrutinized to deduce whether Fischer will elaborate any further on the path ahead for monetary policy. As we get set for the opening bell, the hydrocarbon complex is coming under pressure as comments that the Saudi’s are pumping oil at a record pace weighs on prices. Front month WTI testing a break to the south-side of $46/barrel has managed to keep the loonie from joining in on the USD profit-taking rally, with the pair chopping wood in the mid-1.25s. Given the heightened volatility witnessed post-FOMC, make sure to speak with your dealing teams and devise a strategy that can help capitalize on market opportunities.
Further reading:
EURUSD
Stay Bullish USD/JPY; Don’t Fight The Tape In EUR/GBP – BofA Merrill
