Muted Monday As Dollar Builds a Base

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Market Drivers February 19, 2018
USDJPY back above 106.50
Japanese Trade Balance beats
Nikkei 1.97% Dax 0.39%
Oil $62/bbl
Gold $1347/oz.
Bitcoin $10800

Europe and Asia:
JPY JP Trade Balance 373B vs. 86B
EUR EZ Current Account 29.9B vs. 30.5B

North America:
No Data

With China out on New Year holiday and US closed for Presidents Day it’s been an understandably muted Monday for FX, but the dollar nevertheless continued to build a base and even gained ground against the yen taking out the 106.50 barrier.

After weeks of endless drubbing, the greenback appeared to find a modicum of support at the end of last week and that support appears to be holding for now as EURUSD remains mired near the 1.2400 level while GBPUSD dipped to 1.4000.

This week the market will get a look at Fed minutes which are likely to reaffirm the policymakers hawkish stance and that could provide the buck with some power as the contrast in G-3 monetary policy targets becomes more pronounced. If the Fed hikes rates in March as expected the short term yield on the dollar would match New Zealand’s and at 1.75% would be the highest in the industrialized world. If US growth remains on track, allaying some of the concerns regarding deficit financing the dollar could begin to trade on yield differentials once again staging a rally.

In the meantime, a simple short covering rally would satisfy long-suffering dollar bulls, and the greenback could gain several hundred points over the next few weeks without breaking its long term downtrend bias.

With US markets closed and no economic data on the calendar the rest of the day may be relatively quiet, though low liquidity sessions could sometimes result in sudden moves and if dollar bulls decided to press their case the greenback could verticalize quickly. For now, the 107.00 level in USDJPY remains firm resistance and 1.2350 in EURUSD is core support, but both levels could be tested as the day proceeds.

Boris Schlossberg
Managing Director

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