Dollar Breakout?

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Market Drivers March 7, 2017
RBA maintains steady tone
Dollar mildly bid in Europe
Nikkei -0.17% Dax 0.13%
Oil $53/bbl
Gold $1223/oz.

Europe and Asia:
AUD RBA Keep rates steady 1.5%

North America:
USD Trade Balance 08:30
CAD Trade Balance 08:30
CAD Ivey PMI 10:00

The dollar caught a bid in early European trade today with USDJPY clearing the 114.00 figure while euro slipped towards 1.0550 level and cable broke the key 1.2200 support and stop running and firmer US rates helped the greenback.

The benchmark 10-year rate inched above the key 2.50% level helping to fuel pro-dollar flows after several days of very lackluster action. The currency market may be finally responding to a more hawkish Fed that has consistently signaled that it is on a path to hike rates 3 rather than 2 times this year.

Expectations for a Fed hike in March have ratcheted up considerably with Fed funds futures now assigning a higher that 50% chance of an increase. Still, the dollar rally remained within the recent boundaries of the range with EUR/USD still holding support at the 1.0500 level, USD/JPY capped above the 114.00 figure and only cable showing significant weakness as it broke the 1.2200 support.

Cable is having it own unique problems as it is becoming increasingly clear to the market that the combination of higher inflation and the growing anxiety about Brexit is dampening UK consumer sentiment and growth is likely to slow going forward. The government of PM May is still struggling to trigger article 50 as the amendment from the House of Lords has delayed the proceeding. Overall, cable clearly looks to be a weakest major for the time being and the pair could drift towards 1.2000 over the near term horizon.

Elsewhere the RBA kept rates on hold at 1.5% and maintained a mildly hawkish tone with respect to economic assessment, noting that global demand has improved but labor conditions continue to be mixed. The Aussie spiked ahead of the release but gave back its gains in a general pro-dollar move in early Europe trading below the .7600 in mid-morning dealing.

In North America today the market will get a look at US and Canadian Trade data which will not have much of an impact on trade as the focus will remain on yields. Today’s price action has the signs of a dollar breakout especially if the US labor data, starting with ADP tomorrow proves to be supportive but the greenback will need to take out the key levels at 115.00 USDJPY and 1.0500 EURUSD in order to confirm the rally.

Boris Schlossberg
Managing Director

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