Is Dollar Rally Turning Political Rather Than Economic?

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Market Drivers May 8, 2016

GE Factory Orders better
USD/JPY Eyes 108
Nikkei 0.68% Dax 1.75%
Oil $45/bbl
Gold $1280/oz.

Europe and Asia:
CNY Trade Balance 45.6B vs. 40.3B
AUD ANZ Job Adverts -0.8% vs. 0.1%
EUR GE Factory Orders 1.9% vs. 0.7%

North America:
CAD Housing Starts 8:15

The dollar maintained its bullish bias at the opening of week’s trade rallying against most its major partners with USD/JPY eyeing the 108.00 figure by mid morning London dealing.

The dollar extended its rally which it started last week amidst a generally quiet economic calendar on Monday. Over the weekend China released its Trade Balance which beat market forecasts but for all the wrong reasons. Chinese Trade surplus came in at 45.6B vs. 40.5B eyed but the beat was largely due to a very sharp drop in imports which plunged -10.9% in April. Overall in the January to April period imports are down -12.8% on a year over year basis.

The unexpectedly large decline in imports suggests that construction and manufacturing in China continue to struggle and given the fact that those two sectors are still the primary components of economic activity in the country, the data indicates that Chinese growth continues to slow. The Shanghai index was off by more that -2% on the news, although reaction in commodities was mixed with oil up on the day trading above the $45/bbl mark while iron ore futures were down.

In Europe the German factory orders data came in better than forecast at 1.9% versus 0.7% eyed but euro couldn’t hold its gains in the wake of the release dropping below the 1.1400 mark after rallying as high as 1.1420. The uncertainty surrounding the Brexit vote is now starting to affect the euro as well as many Europeans fear that a UK exit from EU would open up the prospect of other member nations leaving the union which could unravel the whole EZ experiment. Nearly half the Europeans think that other member nations would leave if UK pulled out and approximately the same number believe that UK will ultimately vote to leave on June 23rd.

The latest Brexit polls show that the Leave vote and Remain vote are still in a virtual tie with about 20% of the population still undecided. The bookies continue to favor the Remain side but the Leave vote clearly has the emotional edge and the end results could surprise the market especially if polling remains so tight as we get closer the the referendum. Furthermore the Brexit campaign may have sparked a revolution in opinion amongst the broader European populace with now 50% of the EZ citizens expressing the desire for a referendum in the issue in their own countries.

Amidst such political unrest the greenback looks like a bastion of relative calm, although the political developments in US have hardly followed a conventional path. Still with the prospect of EZ unity under aggressively stronger assault from the independence forces, the dollar could once again become the beneficiary of safe harbor flows and continue to rally on political rather than economic considerations.

With no economic data on the docket for the rest of the day, the markets may continue their quiet meandering ways, but with bias now firmly in the dollar’s favor the North American may see traders try to run the 108.00 barriers in USD/JPY while probing support below the 1.1400 level in EUR/USD.

Boris Schlossberg
Managing Director

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