Dollar Dumped Ahead Of President Xi Speech

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

The U.S. dollar received very little support from Monday’s rebound in U.S. equities. Last week ended with another round of selling but rather than continue lower, stocks recovered as China held off on a direct response to the possibility of another $100B in tariffs. However, Monday’s rally in the Dow is modest compared the sell-off on Friday and with President Trump still tweeting about China and its unfair trade policies, the recovery may not last. This could explain why the U.S. dollar did not benefit from Monday’s risk rally and instead sold off against all of the major currencies with the exception of USD/JPY, which experienced modest gains.

Although no U.S. economic reports were released Monday, this week is not about U.S. data. Trade is the primary focus as investors watch for NAFTA updates and Chinese-U.S. trade tensions. President Xi Jinping was scheduled to speak Monday evening at the Boao Forum in China (its version of Davos). There’s talk that China is looking at devaluing the yuan but the real question is whether China’s president will downplay the trade war or emphasize its willingness to counterattack with great strength if U.S. tariffs go into effect. Based on China’s past responses, the former is more likely than the latter, which would be good for risk appetite and the yen crosses. The dollar, on the other hand, could still suffer as investors worry about the possibility of more aggression from President Trump.

The improvement in risk appetite proved to be exceptionally positive for the commodity currencies, which strengthened across the board on the back of U.S. dollar weakness. The New Zealand dollar was the best performer, but the rally is driven by AUD/NZD selling as the cross dropped to a 1-year low. Australia is far more sensitive to China’s trade troubles than New Zealand because the kiwis primarily export dairy and meat, which is more of a necessity than Australian mining exports.

The prospect of a NAFTA deal and an optimistic Bank of Canada business outlook survey sent the Canadian dollar sharply higher. Businesses are experiencing more capacity pressure, inflation and wage growth. Although 1.27 is an important support level for USD/CAD, a preliminary NAFTA deal is needed to drive USD/CAD sharply lower. The Mexican government doesn’t think there will be a deal this week but it sees an 80% chance of a deal by May. Meanwhile, .7650 continues to hold as support for the Australian dollar, which bounced on the heels of stronger construction sector activity along with the improvement in risk appetite.

Weaker-than-expected German trade data did not stop EUR/USD from trading higher Monday as European Central Bank President Draghi said he sees a strong expansion in the euro-area even as uncertainties such as trade wars endure. ECB member Coeure also doesn’t feel that growth in the region is slowing even though wages and inflation have been subdued according to Praet. Technically, EUR/USD needs to rise above the 50-day SMA at 1.2350 before there can be serious upside momentum. But with the U.S. dollar tipped lower and risk appetite improving, there’s a greater chance that EUR/USD will hit 1.24 than fall below 1.22. Sterling also traded higher following a larger than expected increase in house prices and the general sell-off in the U.S. dollar. No major economic reports are expected from the Eurozone or the U.K. in the next 24 hours.