USD Fatigue Sets In

The USD rally has derailed with dollar backpedalling overnight. This could be attributed to trader fatigue after this week’s frenzied paced sell-off on US bond markets, or even to a bout of nervous nellie profit-taking. However, the dollar pullback is more likely a reaction to the fact the hugely anticipated tax reform broadcast has come and gone and the reality check sets in that the road to reform will be a long and winding trek and an extremely bumpy one at that based on the current GOP squabbling.

All eyes will remain on US treasuries for the foreseeable future as this week’s ferocious action is unlikely to yield anytime soon given the shifting market narratives of a hawkish Fed and upcoming tax reform. However, with market exhaustion setting in, the constant bond curve activity is abating as we enter the weekend and profit taking is setting in.


Although the EUR has fallen on the back of higher US yields this week, the move has remained tidy as there appears to be reluctance to sell the EUR/USD below 1.1700 as traders believe the long-term investors will eventually have the upper hand and remain buyers in EUR/USD dips.

Given the hullabaloo this week over the hawkish shift in the Fed and USD positivity surrounding tax reform, we may be looking at a stronger dollar narrative heading into year-end. However, the EUR needs a distinctive look as the ECB remains the real wild card in the deck. It is possible the more aggressive Fed policy tact allows the ECB more wiggle room. So it is conceivable the ECB will sidestep the inflation conundrum, as did the Fed’s, and will start to normalise policy soon. This allure should be enough to keep interest in the long euro trade as dealers will be more than eager to catch the ECB policy shift momentum.

Japanese Yen

Battle lines are developing between election concerns and US yields, but month-end flows may also be distorting the picture. It is hard not to remain supportive of the long USD/JPY trade, but the market will get the jitters the tighter the election polls run.

Australian Dollar

USD profit taking ahead of .7800 level (this was an active short-term target for the AUD bears) has seen the AUD/USD recover off the overnight lows, but the reasons to sell the AUD remain in place.

Iron ore prices look precarious perched as the decline in prices is surely on the cards if the full brunt of Beijing-mandated steel production restriction comes to fruition.

Also, it is evident the RBA would welcome further currency weakness and its careful approach to tightening policy is arguably second only to the BOJ on the dovish scale at this stage.

It’s even being bandied around market circles that the Aussie may end up being a funding currency as other global central banks gallop towards policy normalisation.

Look for the Aussie sellers to emerge on rallies.

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