USD bear needs one more test

The US dollar finished last week on a low note, with EURUSD above 1.1350 for the first time since March and EM currencies and markets in a tizzy as global markets are celebrating the return of the Fed policy punchbowl. The difficult path for asset markets from here will be how they deal with a real slowdown in the US economy that suggests the Fed was already well behind the curve before launching its easing campaign (nearly guaranteed to start in July). 

So sure, the Fed is set to cut and could cut at a breathtaking clip on deepening signs of economic weakening, but the market’s celebration in risk sentiment terms could come to an abrupt halt. How the US dollar behaves during the next bout of risk-off behaviour is the test for how profound a USD weakening we can expect from here, but the sense now is that the USD is turning lower and may have peaked for the cycle. 

Reserve Bank of Australia Governor Lowe expressed some frustration overnight as he regretted that “everyone is easing”, making it difficult for the RBA to get any traction from its latest easing campaign as he sees the exchange rate providing a major portion of an easing policy’s impact.”…if everyone is easing, there is no exchange rate channel.” He also sounded rather hawkish in saying that “there are limits to what further easing can achieve.” and saying that is dangerous to attempt to out-dove other central banks. In general, his comments echo some of his historic comments expressing distaste for extremely low interest rates. Rather, he argued, the government should take advantage of low rates to invest in infrastructure and provide fiscal stimulus as a better way to stimulate the economy. Is this a hint that Lowe won’t want to take the policy rate below 1.00%? The market is looking for more, so stay tuned.

Well, not everyone is easing and finally the Norges Bank’s “lone hawk” status is paying off for NOK bulls, helped by a strong risk sentiment impulse in the wake of the FOMC meeting last week and a recent surge in crude oil prices. EURNOK has now broken down through the immediate range support, but still has work to do to achieve bear trend status. The divergence of the dovish Fed relative to the hawkish Norges Bank is finally gaining more attention as we discuss in the chart below. 

Trading interest

Looking for going long AUDUSD on dips with stops below 0.6870 and looking to add on a break above 0.7000.

Buying dips in EURUSD (stop placement difficult – sub-1.1300) for a try toward 1.1500.

Chart: USDNOK

The policy divergence between the Powell Fed and the Olsen Norges Bank is the strongest within the G10 and is finally getting traction in the USDNOK exchange rate. The pair is soon within reach of the 8.40 range lows for this year as the market sees the Fed set to deliver a series of rate cuts and the Norges Bank now expected to deliver another rate cut in September (explicitly spelled out by Olsen late last week)