Dollar Recovered Mildly as Market Stabilized from Trump Turmoil, But Stays Weak

Dollar recovered mildly as markets calmed down from US President Donald Trump’s political turmoil. But the greenback is still set to end the week as the weakest major currency. DOW also recovered overnight by adding 56.09 pts, or 0.27% to close at 20663.02 after suffering -372.8 pts loss on Wednesday. S&P 500 was up 8.69 pts or 0.37%, NASDAQ up 43.89 pts or 0.73%. 10 year yield also pared some loss and ended up 0.017 at 2.233, but was well off this month’s high at 2.423. Gold retreats mildly after hitting as high as 1265 and is back below 1250 handle. WTI crude oil extended recent rise to 49.88 and is set to take on 50 handle today. In the currency markets, Swiss Franc and Japanese Yen remain the strongest ones on global risk aversion. That’s closely followed by Euro as the third strongest, on optimism over Eurozone economy and anticipate of a hawkish twist in June ECB meeting. Commodity currencies are indeed generally weak with Kiwi and Aussie trading as the second and the third weakest ones.

Fed still expected to hike in June

Dollar is helped mildly by the fact that traders calmed from the market volatility. There reached a point that the markets were starting to pare back bet on a June Fed hike. But it’s still generally agreed that Fed will go on with it in spite of the current turmoil. Fed fund futures are pricing in 73.8% odd of a June hike, up from yesterday’s 64.6%, even though it’s off of last week’s pricing at 83.1%. And it should be noted again that various Fed officials have repeatedly mentioned that the fiscal polices are not taken into consideration in their own economic projections. That is, the current expectation of a total of three hikes this year is fiscal policy neutral.

SNB Jordan: Expansive monetary policy needed

In a newspaper interview published yesterday, SNB Chairman Thomas Jordan said that the Swiss Franc is still "significantly overvalued". And therefore, "negative interest rates and our readiness to intervene in the forex markets remain necessary". Also, "the overvalued franc, the underutilisation of production capacity and low inflation make it necessary for us to stick to our expansive monetary policy." The Swiss Franc is trading as the strongest major currency this week on risk aversion. However, EUR/CHF is held above 1.0872 support so far and well above 1.0620 key support. The cross has indeed surged sharply after French President Emmanuel Macron’s win in the election. Subsiding political risks in Europe will keep supporting EUR/CHF and relief pressure from SNB for more intervention.

Credit Suisse expects multiple RBA cuts this year

AUD/USD is steady in tight range this week in spite of violent volatility elsewhere. The stronger than expected employment data released yesterday just provided very brief support. Some economists are doubtful on the accuracy of the data. Credit Suisse pointed out that while the headline job number surged, full time jobs has indeed fallen. Overall job growth was 37.4k, with 49.0k growth in part time jobs. That is, full time jobs shrank by -11.6k. And the weakness in the data could be larger if not for statistical distortions. The overall output gap is historically consistent with another rate cut. And Credit Suisse said there is a case for "multiple cuts" this year.

On the data front…

Germany will release PPI in European session, Eurozone will release current account and UK will release CBI trends total orders. Canadian data will be the focus today with retail sales and CPI featured in US session.

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7396; (P) 0.7431; (R1) 0.7454; More…

No change in AUD/USD’s outlook as corrective recovery from 0.7382 extends. While further rise cannot be ruled out, upside should be limited below 0.7555 resistance and bring fall resumption. Below 0.7388 minor support will turn bias to the downside for 0.7382. Break there will extend the fall from 0.7748 and target 0.7144/7158 support zone. On the upside, firm break of 0.7555 will argue that fall from 0.7748 is completed and turn bias back to the upside.

In the bigger picture, we’re still treating price actions from 0.6826 low as a correction pattern. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8115) and above.

Economic Indicators Update