EUR USD USD JPY amp Dollar Index 200 DMA is no inflection point

As US dollar index climbs to its 200-day moving average for the first time in seven months and EUR/USD falls to its 200-DMA for the first time over the same period, those traders anticipating the much-heralded USD rebound may finally see their forecasts realised? Or is this another fake bounce?

After all, USD/JPY bottomed right at its 200-DMA earlier this week, before rebounding to 101.90. What will be the fundamental forces behind a sustainable rise in the US currency, considering tepid US housing data and a Federal Reserve hesitant to rock the bond boat in the aftermath of its tapering operations.

And don’t forget: the preliminary US Q2 GDP due next Thursday will likely show a decline of 0.5%-0.8%, the first contraction in 3 years, following the advanced +0.1% estimate.

Nothing on the US data front justified the latest USD rebound.

Jobless claims rose by 28,000; existing home sales rebounded by half than was expected in April and so did new home sales in the same month. This does not necessarily invalidate the idea of a real estate recovery, but it shows that any rebound has little to do with anything more than post-weather normalisation.

The minutes of the April FOMC meeting were filled with the usual balanced statements, but remarks from Federal Reserve Bank of New York president, William Dudley, triggered some USD hawkishness by re-affirming the plan to raise rates, only to see the effect fade after he threw in the possibility that continued reinvestments in mortgage backed securities would continue even after the first rate hike.

ECB, BoJ resorting to interviews when no action

This leaves us with USD stabilising on the prospects of fresh easing from the ECB and BoJ.

In the case of the ECB, heightened expectations that the ECB will act next month via a cut in the refi rate, or deposit rate, or removing of sterilisation of bond purchases have emerged from the recent ECB rhetoric. Seeing the euro move ahead of expectations is a familiar trait in currencies. The ECB is aware of this reality and any disappointing outcome on 5^th June may lead it to pare its recent 3% decline.

What matters now is the flash CPI figures on 3rd June, which will shape the expectations of the Council meeting two days later.

In the meantime, ECB council members will continue giving interviews on how action is possible in the event of a deterioration in the data.

Relying on interviews has also been the task of BoJ’s Kuroda, after last week’s press conference sent the yen rallying on diminishing prospects of any looming BoJ increase in its monthly asset purchases.

In order to avoid the risk of any premature easing, the BoJ has chosen to wait for the full effect of the April tax hike on the economy before considering more action this summer.

In the meantime, Mr Kuroda will resort to giving statements such as, “We see little reason for yen to strengthen”.

With that in mind, any recoveries in yen crosses (yen selloffs) will be a renewed opportunity to sell (buy yen) as long as the BoJ does not deliver the minimum requirement of adding two to three trillion yen to monthly asset purchases.

200-moving average not yet an inflection point

Although we saw USD/JPY bounce off its 200-day moving average, this is likely to be sign of reversion-play for the shorts, whereby the 102.50s act as ceiling and 100.60 serves as focal point until the BoJ is set to act.

In the case of EUR/USD, the pair is vulnerable to further declines near the $1.35 figure, but only a solid affirmation from the ECB to cut rates, combined with nonsterilised purchases would maintain downward momentum.

Traders will have to differentiate between slow ongoing weakness and 1-2 day declines of 170 pips, which are followed by a gradual stabilisation and rebound. We have seen the latter in November and April. We don’t expect much difference this time.