USD Questions And Answers

What a week it’s been. In the FX markets’ flip-of-the-coin, it appears that heads: bad news for the US dollar, tails: worse news for the greenback. USD/JPY hit a 15-month low of 105.55 and EUR/USD tested 3-year highs of 1.2555 before pulling back by a full cent as traders squared some of their positions ahead of the US President day weekend and the Chinese New Year.

Key Points To Watch

• All currencies gained versus the US dollar this week, but gold and silver came out on top. Both metals rallied against all currencies, even versus the advancing yen.
• The rationale for gold is vital to understand. All eyes were on this week’s US inflation and retail sales for January. The best of both worlds emerged for metals -- CPI rose 0.5% m/m compared to expectations of 0.3%, while
• retail sales were down 0.3% compared to the consensus expectations of +0.2%. We know rising inflation is positive for gold and when retail sales disappoint, it helped gold due to the negative implications for USD.
• Thus, as long as US economic data remains neutral-to-negative and inflation metrics holds up, metals and yields will advance.
• Notably, markets have witnessed several paradigms and patterns in the first half of February, none of which led to a strong US dollar.
• One pattern is worth watching for the next 2 weeks: Are falling equity markets the only medium for a USD recovery – or stabilization? We saw some of this on Friday. Would a failure for the Dow 30 and S&P 500 to regain 25500 and 2745 lead to further USD support?
• That's what swing traders want to know. In this week’s video, I discussed the USD macro view, highlighting the close relationship between deficits and USD. Next week’s release of the Fed minutes may keep the door open for as many four rate hikes this year.

As long as the US economy is set to move from the enormous Fed printing stimulus to a tax/debt stimulus, then we could see as low as 81 in the USD index this year and as high as $1520 in gold.