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Is the dollar back?
Dollar is quietly bouncing back
After several weeks in the doldrums, the greenback started to get some colours back this week, especially against the commodity currency complex. The encouraging July’s jobs report is not the sole driver as a broad base risk-off move is also helping the greenback to recover. Higher yielding currencies such as the Aussie and the Kiwi were the first in line as they retreated 0.58% and 1.24% since Friday. On the other hand, safe haven assets got a booster shot as investors look to reduce risk after a sharp equity rally and a dollar’s debasement that looks overdone. The Swiss franc was up almost 1% against the greenback on Wednesday, while the Japanese yen rose 0.45%. Finally, the yellow metal bounced back to 1,268, on its way towards the next key resistance that lies at 1,296.15 (high from June 6th).
We have been defending for some time the idea that the dollar’s debasement was coming to an end and that this moment has been approaching fast. Obviously, a substantial part of the appreciation can be attributed to profit taking. However, we think the market has been overly optimistic about the ECB policy normalization and slightly too dovish regarding the Fed. Against the backdrop of weak global inflationary pressures, the likelihood that both central banks will stay rather neutral or slightly dovish has rose substantially recently. There is therefore room for downside adjustment in EUR crosses and a recovery in the USD.
Tomorrow’s UK Industrial Production set to print on the soft side
This summer is calm in the markets. This sounds like a pleonasm but while the VIX index has reached its all-time lows earlier last week below 9.5, it feels like that one little piece of information may ignite markets. This is the reason why we keep on monitoring fundamentals data that should have a major impact in the markets.
In particular, any new UK data are important in the coming situation as Brexit negotiations are currently happening. Indeed, those data also reflect the overall sentiment and fears of economic players in the UK economy. Tomorrow’s data should see the industrial production approaching the flat annualized growth rate of 0%.
We consider that markets still overestimate the Brexit impact. Proof is that the predicted collapse did not happen and won’t likely happen. Currency-wise, the pound has appreciated above 1.32 against the US dollar before bouncing lower to 1.30 – This was anyway more because of the dollar weakness -. In our view, any UK soft data is another opportunity to buy the pound in the dips.