Is the Dollar Selloff Overdone?

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Market Drivers July 27, 2017
Profit taking in Asia sees USD bounce
CNY Industrial Profits up 19%
Nikkei 0.15% Dax -0.56%
Oil $48/bbl
Gold $1262/oz.

Europe and Asia:
No data

North America:
USD Durable Goods 08:30
USD Weekly Jobless 08:30

It’s been an extraordinarily volatile night of trade as the currency market continued to react to the post FOMC fallout with dollar coming under further selling pressure in Asian and early European trade.

After the Fed failed to deliver a hawkish enough statement providing mildly ambiguous answers to the question of rate hikes and balance sheet reduction, the market took the greenback to task selling it heavily across the board with several pairs making multi-month highs.

The Aussie exploded above the key .8000 level reaching a high .8065 as carry trade flows and better than expected Industrial profits data out of China, helped fuel the rally. Next week the market will look forward to the RBA which may begin to jawbone the currency as the exchange rate is now well above the .7500 level that they would prefer to see. Still, there is little that Australian authorities can do as all of the Aussie strength is a function of dollar weakness rather Australian domestic policy and the pair is now in the midst of a massive sentiment move.

Sentiment is also driving the EURUSD which broke out above the key 1.1710 resistance to hit a high of 1.1776 in midday Asian dealing. Talk in the market will now inevitably focus on the psychologically important 1.2000 figure, but the pair may see a pause in its parabolic rise in the near term.

The fact of the matter is that US monetary policy remains on a tightening path as the Fed tries to move towards normalization. Only a marked decline in economic activity would force Ms. Yellen and company to change their course and unless the NFPs next Friday produce a massive downside surprise such a scenario is unlikely to take hold. One key tell is the price action in USDJPY which while lower has not collapsed in the wake of the FOMC press release. The pair has held the 110.50 support and if it can recover the 111.50 level in North American trade today, it may be a sign that the dollar selloff is overdone.

Boris Schlossberg
Managing Director

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