Throughout last year and the early part of this year we have maintained a US dollar-bullish view, as interest rate expectations from Washington coupled with weakening fundamentals from virtually all corners of the globe have kept the greenback well in demand.
Since July last year, the US Dollar Index has gained 23 per cent – a staggering nine consecutive months of higher closings. The strong gains have continued through this year, with the currency gaining 8.99 per cent through the first quarter, a period in which the index briefly breached the 100 level (on March 13).
As the Federal Open Market Committee (FOMC) is set to implement its first hike this year, the medium to longer-term view remains firmly entrenched in favour of the dollar. However, in the short term the dollar could come under some pressure, putting that nine-month run at risk.
The commitment of traders report, released by the US Commodity Futures Trading Commission every Friday, is the most accurate tool in understanding market positioning, as it takes into account recordable long and short positions in the futures market. At present, the report shows the market is heavily skewed in favour of the dollar, yet if we pull up the data for the other currency majors, we would notice a slight shift in positioning.
Barring the euro, which had a large drop in long positions last week, all the other currency majors reported either an increase in their long positions or shortened sell positions, with the biggest positive shifting happening in the Australian dollar, New Zealand dollar and Japanese yen.
The FOMC remaining on course for tightening this year will fundamentally keep the dollar in a strong position over its currency major counterparts. However, the recent positioning would suggest a slight correction is on tap for the greenback in the weeks ahead. It is only natural for a rebalancing when the markets are so dollar-bullish, and the most recent US non-farm payrolls report could spark a dollar correction in the weeks ahead.
Last month’s payroll report was mixed in nature, and the report was perhaps the most fitting when describing the upcoming dollar trend – long-term, the US employment picture remains good, with the unemployment rate holding at a seven-year low of 5.5 per cent.
However, only 126,000 new jobs were added in March – half of expectations. Although this may be a minor blip in the report (we would expect to see dollar weakness on increased expectations of a dovish FOMC) this comes as a slight hindrance in sentiment to the US jobs picture rather than the establishment of a new trend. As a result, we expect the US Dollar Index to find initial support at 96.20 levels followed by 94.20 levels.
The euro continued its slide lower and dropped to a 12-year low at 1.05 against the dollar this past month. Trading conditions will remain volatile for the currency, as several key dates will dictate euro sentiment in the weeks ahead. This Thursday is the deadline for Greece to repay its €450 million loan to the IMF. Despite all the confusion (and contradictory statements from within the Greek government), markets can fully expect Greece to honour this commitment come deadline time.
Following the successful completion of this event, we can expect bumps in risk appetite to buoy the euro, particularly against the dollar in the immediate short term. This would open the door for a move towards the channel between 1.11 and 1.12, with stronger resistance coming in at 1.14 levels. The improved sentiment will prove to be short-term in nature, however, with the euro expected to stabilise between 1.05 and 1.07 through the end of this month.
Gaurav Kashyap is an FX specialist based in Dubai