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A resurrection of the US dollar is underway


The US dollar index continues to rise strongly for a second day after it started to fall on March 8. The US-China trade issue continues to influence the US dollar index. President Donald Trump has mentioned that he wants an agreement between US and China that is enforced, not one that is immediate. The quid pro quo over whether a trade deal between the US and China is imminent continues with American officials minimizing the possibility of a breakthrough soon. US Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for meetings at the end of next week with the goal of reaching an agreement after the Chinese Vice Premier Liu He's trip to Washington in April.

The other reason for a stronger US dollar this morning was the flash PMI data. For example, the downturn in Germany’s manufacturing sector has become more rooted with March’s flash data showing accelerated deterioration in exports, new orders, and production. In summary, when the rest of the world does terribly economically, the US dollar increases in price. The EUR/USD pair fell 0.9 percent, from 1.1391 to 1.1289 in only 45 minutes this morning.

The Loonie finally showed its real face, falling for a second consecutive day. This morning we had important economic data. In the first place, the consumer price index (CPI) came in at 1.5 percent on a year-over-year basis in February, versus a 1.4 percent increase in January. Also, excluding gasoline, the CPI rose 2.1 percent, matching the gain in January. In the second place, retail sales decreased for the third consecutive month, declining 0.3 percent to CAD$ 50.1 billion in January. Sales were down in 4 of 11 subsectors, representing 52 percent of retail trade. It is difficult to assume that CPI data is influencing the Loonie negatively because it should have pushed the Loonie in the opposite direction. However, we can assume that retail numbers are confirming the weakness in the Loonie.

The USD/CAD moved in a 44 pips range this morning (a high of 1.3427 and a low of 1.3383) after the release of CPI and retails numbers, but it is staying within this range; it is still trading at 1.3400 handle at the time of this writing. It is important to notice that the correlation of the Loonie with crude oil has disappeared this week, so market participants are more focused on fundamental factors when they trade the Loonie.

For today’s trading session, both technically speaking and given the “risk off” environment, the USD/CAD has a support of 1.3380, but it might test some resistance levels. It is critical to watch 1.3443, but first 1.3420. Of course any mood change in the FX markets might change the support and resistance levels drastically.

The Euro saw most of its recent gains against the US dollar wiped out yesterday. There are further losses on the cards for EUR/USD today after the Euro received “back to reality” news. Markit's German manufacturing purchasing managers' Index crashed to 44.7, well below the 50 points threshold that separates contraction from expansion. The EUR/USD pair fell 0.9 percent, from 1.1391 to 1.1289 in only 45 minutes this morning.

Blink, and you will miss it. Over 1000 days of Brexit news and updates, while dramatic, was often spaced, providing observers time to reflect and analyse. However, the closer we get to the March deadline (remember as things stand the UK is still leaving in seven days) the updates and developments are coming quicker and quicker. The latest overnight is that the EU is willing to offer an extension until May 22, which is short of the June 30 extension that Prime Minister Theresa May was pushing. However, in another Brexit twist (George R.R Martin should be taking notes!) the EU has added a caveat. If May’s Withdrawal Agreement is rejected next week, then the extension only runs until April 12. On the surface, this seems a sensible and logical move from the EU, however, they may have missed the fact that John Bercow may still not grant a Meaningful Vote 3.0 and MPs may get riled by the EU holding a gun to their heads.

Elsewhere, the Bank of England also kept rates on hold with all nine members of the voted to keep rates at 0.75 percent, and despite raising its growth forecasts for the current quarter, the British Pound had some torrid moments in yesterday’s trading session. We have long maintained that the GBP/USD 1.3000 handle has been the border between Brexit certainty versus uncertainty, and now it is trading at 1.3185, but the question is, is the market really sure of Brexit results?

The Australian dollar followed a similar story to the Euro overnight, as it has seen most of its recent gains against the USD wiped out as it neared month highs. It could be a quiet week next week for the Aussie dollar, and there’s certainly little to report on the calendar front. However, the US is sending over both Mnuchin and Lighthizer to China next week so that any US-China trade updates could impact the Aussie dollar. At the time of this writing, the AUD/USD pair is trading at 0.7100 handle, representing a 0.20 percent fall.

Not wanting to sound like a broken record but yesterday the Kiwi performed similarly as the Euro, Loonie, and Aussie. Next week though could be significant for the New Zealand dollar with the latest Reserve Bank of New Zealand meeting. The RBNZ finds itself at a crossroads as it struggles to maintain a ‘neutral’ policy outlook and next week could see a shift towards a looser policy which will hamper the Kiwi. The NZD/USD pair is trading at 0.6883 this morning, 0.1 percent higher, but the question is, are we going to see the Kiwi breakout to new highs after good news from RBNZ or it will fall because it is trading at a critical resistance level?