Dollar Optimism Waning

Daily Analysis - 23/03/2015

Spectacular Multi-Month USD Rally in Process of Reversing

The dollar is busy retesting lows from last week as speculation about another possible round of quantitative easing is rumored in the pipeline to fight the recent escalation in dollar strength. Markets will continue to intensely monitor the US economy for signs of growth ahead of Friday’s final fourth quarter GDP figure.

Dollar Strength Fading

After rebounding from FOMC lows, the dollar is trending lower once more as data points overwhelmingly towards a reversal in recent strength. The combination of fundamental and technical factors warrant a deeper pullback in the dollar as the Federal Reserve sets its sights on higher rates amid a decline in the real economy. Housing data last week showed that vital components of the real economy continue to languish with spending and manufacturing pointing to a similar conclusion. The softness in the dollar could prove temporary as lacking monetary easing and interest rate forecasts see strength resume after a technical retrace. However, any further gains in the dollar would likely constrain growth further as exporters and multinationals revenues suffer from a relatively expensive currency.

Base Metals to Fall Further

Australian mining Fortescue highlighted the continued softness in demand for industrial metals after shelving a bond offering last week with the company forecasting oversupply issues hitting iron ore. This comes at a time when demand from China for Australia’s exports is waning, further pressuring the Australian economy. Another main industrial metal, copper, is also facing persistent pressure as supply continues to outpace demand. The last few years saw massive mine and refining capacity come online as cheap borrowing fueled the expansion. However, with supply now outpacing demand, similar to the oil industry, copper producers are offering purchasing discounts to maintain market-share. While copper prices have temporarily rebounded on weakness in the dollar, any revision lower in global growth forecasts will likely weigh on prices further.

Greece and Germany Remain at Odds

Greek Prime Minister Tsipras is in Berlin, meeting with German Chancellor Angela Merkel after deposit outflow momentum in Greece accelerated last week. With the nation almost out of operating cash, pressure to make a deal is higher than ever. The Euro Group discussions that concluded Friday saw no real progress after earlier leaks pointed to an agreement between sides that was later invalidated. The gap between parties remains wide even though the latest negotiations are last chance to make a deal that keeps Greece in the Euro. Meanwhile, the ECB’s quantitative easing program is progressing with data this week forecast to show lending in the Euro Area expanded for the first time since 2012. However, the political risk from Greece is still weighing on the Euro and the Central Bank’s efforts to revive growth.

EURCHF Equidistant Channel

The promises of the Swiss National Bank to defend the Franc are running into serious headwinds as the EURCHF pair rapidly approaches the lower bound of the targeted “soft peg” between 1.0500 and 1.1000. Fears of a Greek exit coupled with the ECB’s quantitative easing program have forced the Euro lower as investors are increasingly seeking the haven status of the Franc. The equidistant channel has been setting up in EURCHF since rebounding to the highest level after the intervention on February 20^th. The downward trending channel has a bearish bias with the optimal strategy following the trend with short positions at the upper channel line to be closed at the bottom of the channel. Fighting the trend with long positions reduces potential reward while increasing risk.