Commodity currencies rising on the falling US dollar
The markets had been waiting to hear whether the FOMC meeting would conclude with any sort of tapering or rate adjustment. The Fed once again kept everything on hold while they await further substantial progress.
The forex heatmap from youtrading.com shows that the London session has started much like the end of the US session post the FOMC. The US dollar is being sold off and the commodity and major crosses are all benefitting. The yen is also weaker so no real signs of risk-off either. The weaker dollar is allowing the XAUUSD to rise out of its tight range and oil is also finding it easier to break out this morning towards $73 per barrel.
The question is why the selloff in the US dollar? There was no talk of tapering in the recent meeting or the coming meeting, though analysts feel Jackson Hole could be the time they announce something around the end of the year. Whether there will be evidence of substantial progress in the employment data is doubtful as the latest data around the COVID-19 delta variant is worsening and the uptake of vaccinations in the USA has plateaued. Bottlenecks etc. will continue to disrupt and inflation is likely to remain above 2% for a lot longer. The Fed didn’t seem to be worried about that though?
The US dollar index could be coming down to test the daily 200 exponential moving average, but considering the impulsive move higher was on the markets perceived view that the Fed was more Hawkish, this could be unwound fully as they are keeping monetary policy the same for long. The Feds Fund Rate (FFR) remains 0-25bps, the IOER is unchanged at 15bps and QE remains $120bln/month. There was a couple of technical adjustments in the form of Repo facilities. The NY Fed will now create domestic and foreign Standing Repo Facilities. Which is a bizarre move IMHO.
Currently, the Fed is conducting almost $1trln of Reverse Repo Agreements, which effectively takes excess cash off the Commercial Banks' balance sheet and replaces that money with High-Grade Collateral, such as T-Bills and Treasuries. The standing repo facility announced last night would put the money back onto the banks’ balance sheets. Why not just reduce the amount of reverse repo?
With regards to foreign central banks and their new standing repo facility, there had been analysis stating that there was a shortage of Eurodollars which are global offshore dollars. This shortage then creates a demand for US dollars which would push the price of DXY up etc. If the Fed is now offering foreign central banks an overnight facility it will be interesting to see who takes advantage of this, whether the swap lines that were being used by the likes of the Swiss National Bank continue to be used and whether the US dollar continues to fall.
Later, today we have Tier-1 data from the USA. The Advanced GDP q/q is expected to come in at 5.4%, but the Atlanta Fed GDPNow is currently estimating GDP to be 6.4% so we could be in for a boost this afternoon.
The ActivTrades sentiment indicator is showing that a growing number of traders on the platform are bearish of the single currency.
These short traders are being squeezed now, as the EURUSD has clearly broken out of the descending channel and is likely to target the start of the impulsive move down from mid-June, and depending on where the US dollar ends up, we could be testing the highs and 1.2300 and the yearly highs. European news out this morning has been mixed, with French Producer Prices rising in June but Spanish unemployment missing analysts estimates. German unemployment reduced beyond expectations which are also giving the euro some strength. Across the regional German CPI data that came in this morning have all so far reported higher than expected CPI numbers.
The softer US dollar could save the AUDUSD from falling further. Traders will be eyeing whether the Aussie can get back above the level which had been a swing high in September 2020 as there has been discussion on how China will bring the Australian Iron ore prices down, which of late have been rising due to the weakening Australian dollar. Iron ore prices may come down as China is investing in its own production and mines and Brazilian exports are rising.