The US dollar is basking in the afterglow of the ECB dovish turn. And while there remains an immense risk in global markets, the latest G-10 central banks dovish turn suggests there are fewer reasons for the USD to underperform this morning.
But when you factor in the new Fed chair is soon to be announced, robust USD economic data and the US House’s budget resolution vote passing, we could be on the verge of an extended US dollar rally.
ECB president Draghi completely underwhelmed market expectations as the ECB erred on the side of caution. But the trap door was sprung when Draghi said QE is “not going to stop suddenly.” The euro plummeted as traders scurried to re-price the first ECB rate hike expectations well into 2019. And while the weaker euro should not be a means nor a goal of the ECB policy, it’s hard to overlook their recent concerns about the strengthening euro weighing on exports, and we can only conclude this fear was significant factor in their policy decision.
The US dollar then kicked into overdrive thanks to the US House’s budget resolution vote. The bill has passed 216-212, lifting USD and U.S. 10-Year yields close to 2.45%. But given the slim margin of victory, it is still a footslog to Tax Reform passage due to the non-partisan Senate faction. It is an extremely dollar positive turn of events nonetheless.
The Euro
Asia Traders are wasting no time this morning jumping on the bandwagon. But with the ECB rolling out Praet, Nowotny, and Weidmann for their policy views later today, 1.1600-25 could prove to be a stable interday support level until the airwaves clear.
The “pain in Spain” is looking more tenuous and with ART155 likely to be triggered, near-term prospects for the EUR should continue to sour.
Japanese Yen
Traders find themselves in unfamiliar territory this morning now looking to ride the dollar wave rather than to fade it. This psyche is likely holding back a further extension of USD/JPY move. With the USD dollar stars aligning and the BoJ seemingly committed to the relaxed monetary policy stance with Abe’s set to engage a whole new level of fiscal reform, this should undoubtedly prove detrimental for the JPY.
The Australian Dollar
The Aussie dollar fell after an overly cautious RBA Deputy governor Debelle warned about weak wage growth. The lack of wage growth is one of the principal tenants in the lower Aussie dollar narrative as lack of any wage inflation to mollify the household debt burden will continue to weigh dovish on RBA policy.
AUD was then hammered mercilessly after the US House’s budget resolution vote passed as the Aussie is the currency with the most to lose from the stronger US dollar and higher US interest rate storyline given the overtly dovish RBA outlook.
Canadian Dollar
Adding to the Canadian dollar swoon, Governor Poloz told the CBC “a lot of things” need to come together before the bank is confident enough for a hike. Like so many other countries Canada is suffering from skyrocketing household debt, and without wage inflation to soften the burden, the BoC will likely be on hold for some time to come.