Just when you think the US Dollar has reached its limits, the market turns around and bites you time and again.  Buying has been pretty much broad-based if not erratic in terms of timeframe, having brushed off the Fed pause earlier in the year.  It is not so much a case of the neutral stance adopted by Powell and Co, but the market shift in the Fed funds outlook over the near term horizon which could, or dare I say should have produced a little more of an adjustment in the USD at the time.  Mid 2018, the most conservative projections were calling for 2 hikes this year, yet futures are now pricing in odds of a cut at the end of the year, if not early 2020.

Of course, central bank peers have moved in near unison, with the added concerns in some cases over the lack of policy ammunition – oh, how the ECB regret holding back on normalisation a year ago!  Much of the Fed’s normalisation process was down to creating a buffer for an eventual slowdown, which is now biting down hard on many of the world’s major economies.  Little wonder then that the greenback remains on the front foot.  Even so, the lack of material adjustment mentioned above is promoting a sense of unease over the latest round of USD buying.  As weak as the EUR is in the current climate, losses are relatively orderly given the level of slowdown in Europe.  Despite dwindling global demand, importers of European goods will show good interest to lock in favourable rates at these levels, so we expect stronger real money support for the single currency should we delve into the 1.1100-1.1000 zone.  Ahead of the European elections though, it is hard to argue for material recovery irrespective of narrowing rate differentials further out on the curve.

What has been surprising of late is the lack of positive leeway in the commodity currencies.  The Canadian housing market has been widely acknowledged as a key concern for policymakers in Canada, much in the same way as it is for Australia.  However, despite the worries over China and demand there-from, positive data readings, not least of all the PMIs have failed to bolster the AUD to any significant degree.  The correlations with base metals prices including Copper seem to have evaporated.  Instead, we are now looking at a move below 0.7000 as the market readies up for anticipate rate cuts from the RBA (RBNZ), while the CAD has pierced 1.3500 against the USD in response to a further accommodative shift from the BoC on Wednesday.

As for GBP, even the UK pessimists could not have called the calamitous performance in the House of Commons in recent weeks.  The latest weight around Sterling’s neck is a potential change in Tory leadership, with pro Brexit names lining up, led by Boris Johnson and Dominic Raab.  So much for the vote to take no deal off the table – a move which eventually led to a Cable move close to 1.3400.  It has been one way since, with 2 Brexit delays underlining the political paralysis and reducing odds of a soft Brexit in the process.  At this stage, it is a little early to say whether the retreat below 1.3000 can extend beyond the 1.2800-1.2660 support zone, but with the USD sizzling again, one cannot rule it out.  GBP bulls will be looking for some positive developments from cross-party talks, though discussions are reportedly going nowhere fast.

As such, there is only one currency which offers any peace of mind in the current climate, though expect the market to pounce on any viable alternatives should they present themselves.  Liquidation risk is increasing by the day, so in terms of price action, it is reasonable to believe that USD gains will be hard-fought from current levels.

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