USD Bears Get 'Hammered' On Hopes Of Trade Turnaround
Matt Simpson June 6, 2019 2:56 AM
News that US Congress could challenge Trump’s tariffs on Mexico saw a reversal of fortunes for a bruised USD, creating a series of potential reversal patterns for some USD markets.
Late on the 31st May in the US, President Trump roiled markets by threatening a 5% tariff on all Mexican goods. Naturally this saw a flight to safety with JPY and CHF attracting FX flows, the collapse of US yields and gold rallying close to its 2019 high. However, an interesting feature with this round of tariffs is that the USD hasn’t behaved as a safe-haven like it has during the US-Sino showdown. Trump is effectively fighting a trade war on two fronts which, when combined with weaker economic data and rising expectations of a Fed cut, has proven too much for the greenback which has buckled under the strain.
Yet, despite the gloomy outlook for dollar bulls, it’s worth noting the bullish reversal for USD when markets began to suspect Mexican tariffs may not be implemented. This resulted in a series of hammers across USD markets and could leave potential for further greenback strength if trade talks progress, at least over the near-term.
If we look at how JPY and CHF have fared since Trump’s announcement on 31st May, the Swiss franc has been the stronger performer. However, if the negative sentiment surrounding trade improves, we know safe havens get quickly dumped which leaves the potential for USD/CHF and USD/JPY to bounce on a near-term basis, before fundamentals weigh on the USD again.
USD/CHF appears set for some mean reversion:
- An elongated bullish hammer failed to close beneath the 0.9895 low yesterday, warning of a fakeout.
- Yesterday’s low was overstretched beyond its lower Keltner band, before closing just back within it.
- By historical standards, prices are overstretched relative to the 20-day average, which can be seen on the DPO indicator (the detrended price oscillator, which simply measure the distance between price and its average).
Over the near-term we see potential for a bounce towards parity / the 1.0008 low. The success (or failure) of US-Mexico trade talks will likely have a large impact on USD direction, so we’ll keep an eye on headline risk as it could make or break this near-term bias. We also have NFP tomorrow to keep a close eye on.
However, given the intraday break of the 0.9850 low following the break of the September 2018 trendline, we’ll be looking to fade into areas of resistance if signs of USD weakness returns, following a phase of mean reversion.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.