Relentless buying in recent months have seen some key levels reached across the currency spectrum, but this does not seem to be deterring the market from pursuing even better levels in what have been a number of impulsive dip buying episodes. Given the constant stream of strong data and the increased likelihood that the Fed will hike 4 times this year, market participants feel this is not yet fully priced into the USD. This can be somewhat abstract and subjective at times, depending on what metrics one uses, but in light if levels attained in the short space of time, one thing is clear - the current limits are holding fast and on each failed attempt, we are vulnerable to a short squeeze at some point.
Many still view the overall moves seen this year as largely corrective. At the start of the year, focus was on the budget deficit for the large part, though partly down to notable period of USD weakness, the trade deficit has come in slightly, with the goods balance contracting by some $4bln in May. Will the latest developments have the opposite effect? Quite possibly. And when adding in the uncertainty of the tariff wars which look to be escalating, any major positioning can come under some readjustment, and this is one of the key risks we see in current USD levels.
Technically, the next key upside target for USD bulls comes in at 96.60, which would tie in with a EUR/USD move to 1.1200-1.1300, but 1.1500 has provided a major stumbling block on a number of occasions, and we will need some decent volumes to push through for what many are expecting to be the next phase of the USD move higher. That the par cannot lower is more of a concern given the political wrangling within Europe, while policy divergence is clear to see and has been compounded by the ECB's insistence that after QE is complete, rate normalisation will not begin until after mid 2019.
The BoJ continues its own QQE unabated in its quest for inflation pick up, but here also we are struggling into the 111.00-112.00 as sellers factor in not only the risk sentiment, but also the rising debt pile at the central bank and the (eventual) subsequent unwind which will no doubt have to follow. There are also murmurings that the BoJ may even lower their inflation target, but this has been offered limited coverage lately, but will certainly have an impact on all the JPY pairs, including the USD.
USD/CHF has also been struggling into the parity level as rate differentials offer an even better carry trade then USD/JPY. In spite of the lack of pick up in safe haven demand at the present time - and this is illustrated in the sell off in Gold - it looks as though some exhaustion levels have been met here also. The back-stop of SNB intervention also offers a supportive tone to the pair, but this has larger implications for EUR/USD given their focus on keeping EUR/CHF below 1.2000.
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