USD eyes the highs, but what's the catalyst?

The US dollar continues to pull slowly stronger as risk sentiment weakened overnight, arguably driven by the escalating trade war narrative. Some point to further defiant rhetoric in the Chinese press while the USDCNY rate pokes near the highs for the cycle. A weak flash May PMI from Japan overnight dropped below 50 again after 50.2 in April, underlining the risks of our “False Stabilisation” theme.

Adding to that, while French flash PMIs this morning improved slightly, the flash May German Manufacturing survey dropped even further to 44.3 from an already eye-watering 44.4 in April. The tough part is eliciting any reaction in EURUSD, which reacted all of two or three pips to the release of the Federal Open Market Committee minutes late yesterday.

We're not sure where the market is looking for a catalyst outside of the obvious USDCNY focus around 7.00...

Sterling continues to drop aggressively as it seems unlikely that PM May’s plans for a fourth vote for a deal will ever see the light of day, and yesterday’s resignation of a key cabinet minister is seen as a sign that her resignation is a matter of days, if not hours, away. The timing couldn’t be more interesting, given that the EU Parliamentary elections are to be held today in the UK and the Brexit party looks set to reap votes from not only disaffected Tories, but potentially also pro-Brexit Labour voters.

Certainly, the most motivated to vote will be pro-Brexit voters in an election that historically has very low turnout. Effectively, it’s a referendum for or against hard Brexit. Sterling is suffering the lose-lose mindset that this either leads eventually to a no-deal Brexit or a Corbyn government if elections are called. The political situation is very fluid.

Trading interest

• Adding USDCAD long interest (stop well below 1.3400) to USD longs versus AUD and  EUR (EURUSD perhaps most compelling through relatively short-dated options near the money, given utter complacency and low implied volatility).
• AUDNZD longs for strategic trade (stop below 1.04, targeting 1.10-1.12).

Chart: USDCAD

USDCAD saw a compelling reversal for the bulls yesterday, as a brief poke to new lows on a strong Canadian retail sales report was scooped up and a sharp sell-off in crude oil after the weekly US inventory report added energy to the upside.  This looks like a reasonable technical hook for bulls to re-engage for a try at the cycle top above 1.3600.