The USD regained some semblance of composure overnight as rises in equities, oil prices, and yields provided the scrim for a bustling overnight session where the greenback showed its fortitude while consumers found their confidence. Though the dollar is not out of the weeds by any stretch, US economic data was convincing. The US Consumer Confidence Index came in at 125.6 versus 114.0 as expected, the highest reading since 2000, suggesting the US economic climate will continue to run hot, despite the Presidential approval rating indicating a high degree of discontent among Americans with the current political landscape.
Further underpinning the greenback were comments from House Speaker Ryan suggesting that the GOP were unified when it comes to tax cuts. News from media website Axios claimed that the Trump administration is looking at driving tax reform and infrastructure concurrently, which was also viewed as dollar bullish. After getting hung out to dry by the Tea Party bulwark House Freedom Caucus, President Trump looks set to dangle the infrastructure carrot in front of the Democrats to win House support, hopefully buffeting GOP ultra conservatives who would likely oppose increasing budget deficits to spend on infrastructure.
With the market underpricing the Fed dot plots, comments from Vice Fed Chair Stanley Fischer also added to the dollar appeal. Widely considered part of Dr Yellen’s inner circle, Fischer sided with the three hike camp for 2017 that reinforced the Firewall around the 2.3% critical support level for US 10-year yields.
Despite the short-term noise, it’s difficult to home in on any particular chrysalis for yesterday’s price action. The randomness of profit taking and position cutting in a session that, for the most part, was devoid of any significant conviction suggests that G-10 continues to trade within a very defined channel all the while dollar bulls look for glimmers of hope to re-engage the USD.
Australian Dollar
The AUD flirted with and finally ceded the .76 level overnight, then quickly bounced higher on the improved risk outlook and firming commodity and energy prices. The dormancy in the Aussie dollar suggested a lack of conviction and reinforced that the price action overnight was little more than short-term position squeezes.
With no clear catalysts, I can only lean on rebounding oil prices as the commodity driver. Reuters reported that Libya’s NOC had declared force majeure on loadings of Sharara crude from the Zawiya terminal, confirming earlier reports that Libyan oil output dropped after Sharara/Wafa fields were said to close. The production disruptions will weigh on supply and support oil prices.
The bump in oil prices should have some legs and could provide a welcoming underpin for risk assets through today’s session, keeping the Aussie well clear from overnight lows.
Euro
Short term overbought indicators likely spooked euro traders, and it took little more than a slight dollar bid to chase the near-term weaker EUR longs out the back door. However, the market was also weighing comments by ECB chief economist Peter Praet, who suggested it was premature to discuss a QE exit. Nevertheless, it was the express elevator down after taking the stairs up for EUR bulls. But let’s face it, markets never go up in a straight line, and if we discount Praet’s comments, which are likely erroring dovish until the French election risk completely evaporates, it could be far too early for the market to give up on this possible major positioning event in the EUR.
Japanese Yen
The stable equity market and higher US yields supported the USDJPY trade overnight, with the downside looking less ominous as we enter hump day. The market will likely concede the short trade for the time being. The US consumer confidence report will have the dollar bulls gloating that the dollar’s demise was premature, which will provide short-term dollar support.