Strong, not weak
A “strong dollar”, is preferred after all, taking Trump’s Thursday night comments at face value, not the weak dollar Treasury Secretary Mnuchin indicated was tolerable a day before. It barely matters that the White House’s about-face looks ridiculous and strains the credibility of any foreign exchange policy it is formulating on the hoof. The comment was the pretext the greenback needed to create a floor—no matter how temporary—after falling 12% since last April.
Not sustainable yet
Having finally found that floor near three-year lows, the next important question is whether it’s a sustainable one. No. We don't think structural fundamentals favour a sustained revival of the greenback: last night was a reminder of how capricious the White House's exchange rate policy can be; elsewhere in Washington, relative yield attractions of Fed tightening are dwindling in the minds of market participants. And 'protectionism'. Any disappointment in Friday’s first look at Q4 GDP will have a predictable effect on the dollar. Still, moves across major pairs in the opposite direction than the one we’ve seen for weeks have been eye-catching.
The yen was already back on the offensive by Friday’s European capital markets open, up 44 pips at ¥108.95. The dollar had tasted the yen handle above to as high as 109.77 partly helped by the BoJ’s central bank head Kuroda noting FX rates should reflect fundamentals. There were no tightening signals in policy minutes released during the session. The yen reversal widens known support from 108.28 to the new cycle low of 108.48.
GBP/USD, EUR/GBP and UK GDP
Cable was also on the front foot, up from as low as $1.4084. Still, damage to the euphoria has been done. The tell-tale level we speculated about on Thursday—the weekly high in Referendum Week at $1.4349 was narrowly missed. Continued failure to cross it beckons the downside. However, note weekly momentum studies are slightly below their most recent overstretched peak, from last March.
First assessments of UK GDP at 9.30 GMT recharged cable as expected, taking it to a new high for the day of $1.4285 up almost 130 pips. The pound kept heading back to Thursday’s new cycle high against the euro at 86.84p, which almost matched its 86.87p low on 8th December. Euro’s rise versus sterling stalled well before confirmed resistance at 87.99p.
Draghi’s essential non-intervention in ‘euro-phoria’: his remarks about ‘uncertainties’ wrought by a strong currency were more like neutral scolding than a warning. This allowed the euro to claw back as much as three quarters of its run to as high as $1.2536 on Thursday, despite Trump. Resistance became evident at $1.2490s in Europe, below Asia’s $1.2506 high.
Gold bugs weren’t entirely done with gains either. Six straight higher weeks could stretch to seven on Friday. The price of an ounce was 3 cents off last year’s $1,357 high at last check, up a solid $7.32 on the day. Gold has marked a new peak for the year at $1,366. If we take $1,357 to $1,375 (2016’s top) as a range, staying within it by Friday’s close would maintain gold’s shine for even longer.
The intra-session pullback in European currencies has filtered through to equities, creating a mild bounce from Thursday’s sharper falls. Another round trip for U.S. shares which ended at all-time highs is also rubbing off here. Indices look vulnerable though. Feedback sentiment from a likely fall for the week—the first this year—is also weighing. LVMH, Temenos and Telia are among the leaders on Friday following earnings. Three of FTSE’s usual helpers—metals, e.g. copper, oil, gold and sterling—were behaving. This helped the benchmark break a two session fall at 7622 support from late December.
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