What to watch: Time for investors to consider closing USD positions?

There’s no disputing the USD hype train picked up substantial speed last week, but investors should be extra vigilant towards the US Dollar profit-taking we noticed on Friday afternoon continuing at the beginning of this week. Following a series of optimistic US economic releases, investors once again began to price in a sooner-than-expected US interest rate rise, but you only have to look at the comments from Federal Reserve Chair Janet Yellen on Friday afternoon where she stated that supportive policy is still needed in the “slow global recovery” to be reassured that an interest rate rise is not going to happen in the short term.

If you look closer at some of the recent data, the Federal Reserve were provided with at least two reasons to cool down interest rate talk last week. The most obvious reason is the US economy added only 214,000 jobs to its economy, which was slightly below expectations, and will encourage future FOMC Minutes releases to continue expressing the US economy is performing “moderately” and thus rates will remain “considerably low” for some time. While the second reason – and this has not been reflected fully in the markets yet – regards the US Trade Deficit unexpectedly widening in September.

The Trade Deficit widening actually provides the Fed with a future opportunity to talk down the Dollar because the higher valued USD is impacting export competitiveness. The Fed can then suggest that if this trend continues, future economic growth reports will miss expectations, with this delaying a rise in interest rates. The last time the Fed tried to swerve away from rate hike expectations, it used the inflation card. The problem with suggesting the higher valued USD would negatively impact inflation was that the inflation data surpassed expectations; but the Trade Deficit widening provides some truth behind the higher valued USD impacting economic data.

If you look at the charts as the European session gets underway, there is already some evidence of profit-taking beginning on the Dollar today. Both the Euro and Sterling opened only slightly higher against the dollar, but both the Aussie and Kiwi gained around 40 pips. In regards to USD led pairs, both the USDJPY and USDCAD have declined by over 100 pips since Friday afternoon. Both pairs appreciated substantially in November and if investors do decide to part with the Dollar, traders can look for a pullback in these pairs.

The USDCAD seems to be consolidating around 1.13 on Monday morning but further support can be found around 1.1265 and 1.1230; whereas USDJPY volatility is much higher and the pair has already dropped below 114 at the time of writing (113.852). If investors do close positions on the USD – like they also did on the Monday following the previous NFP release – USDJPY support can be found at 113.555 and 113.170.

Written by Jameel Ahmad, Chief Market Analyst at FXTM.

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