Is the US Dollar Narrative Changing?

Is the US Dollar Narrative Changing?

Anyone who has been following the Currency Market would know that the US Dollar weakness has been a dominant theme since the second quarter of 2020. Dovish FED, loss of safe haven appeal following the recovery in global risk appetite and economic damage from the pandemic, all led to the deterioration of the fundamental landscape for the US Dollar. The chart below shows the USD index depreciating just above 14% (103.78-89.08) via DXY (measure of the USD against a basket of currencies). Investors and major financial institutions continue to remain convinced with the idea of further falls in the US currency for 2021.

Dollar Index Daily
Dollar Index Daily

US Dollar path of least resistance about to change?

Let’s take a look at the fundamental and technical forces propelling the US Dollar.

USD Events
Source: Bloomberg.com

US Labour Market

Non Farm Payrolls

Non Farm Payrolls

US Unemployment Rate

US Unemployment Rate

The strengthening of the labour market is evident from the stellar jobs report released for the month of February. NFP reading of 379K above the economist consensus of 182K in conjunction with unemployment rate inching down to 6.2% continues to highlight the prospect of an economic rebound. Even though the unemployment rate currently remains well above the pre-pandemic levels, it is the downward trajectory of the graph that demands attention.

Keeping it simple, let’s look at the transmission mechanism below.

Transmission Mechanism

And let’s not forget, spending comes with inflation.

US Manufacturing Sector

US ISM PMI
Source: Trading Economics

The US ISM manufacturing PMI index has seen a positive rise since the start of the year. A reading of 58.6 was seen by the month February which is a decline from January but still signs highlight a positive upturn in the US. There was a substantial rise in input costs due to shortages in supply and transportation delays which has led to a rise in input costs.

US/EU Manufacturing
Source: Trading Economics

As the EURO remains the most significant component of the US Dollar index. It is worth comparing the US manufacturing sector with that of the Eurozone. Even though the manufacturing activity is climbing in both economies, clearly the US is currently leading the field. PMI’s play a huge role in forecasting future economic growth.

Rising US Yields

US Yield
Source: Trading Economics

Rising US yields and the bloodbath in Bond markets is currently what every financial newspaper is talking about. However, the implications of rising yields in terms of the US currency is a phenomena that is currently being ignored by the market.

US Dollar Technical Outlook

USD/JPY

USD/JPY Daily
USD/JPY Daily

  • Exchange rate Dollar Yen has gained 6% since bottming at the¥102.50 level in december.
  • USD/JPY continues its ascent with prices now trading above all major SMAs(20,50,100 and 200), with the break above the ascending channel now targeting the psychological ¥110 level.

USD/JPY Weekly
USD/JPY Weekly

  • USD/JPY seems to be breaking out of a symmetrical wedge running since 2016.
  • It is worth noting prices have been supported around the region defined by the 38.2-50.0% Fibonacci retracement of the 2011-2015 move.

USD/CAD

USD/CAD Weekly
USD/CAD Weekly

  • USD/CAD is currently testing support around a psychological significant 1.25 level, with an ending diagonal forming with momentum divergence.
  • Canadian Dollar has been benefiting significantly from rallying crude oil prices and global equity market rally, being a risk-on currency.
  • Bullish engulfing outside day reversal has taken shape on the weekly chart building case for a temporary bounce.

USD/CAD Daily
USD/CAD Daily

Lets analyse the Crude Oil component of the Canadian Dollar. Crude Oil Daily
Crude Oil Daily

  • Crude oil prices have been rejected around a longer term resistance level($66.50) forming the dark cloud reversal on the daily chart.
  • At this point it is worth considering the extent to which all the good news is perhaps priced into the Crude Oil markets.
  • A correction lower in the short term remains likely.