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USD shorts to have their convictions tested today

Erik July 29th, 2020

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SUMMARY

  • USD broadly lower overnight; some shorts lightening up in early NY trade.
  • FOMC press release at 2pmET.  Powell press conference at 2:30pmET.
  • Consensus trade is to stay short USD expecting a more dovish Fed today.
  • Key USD support levels to watch: 1.1750s vs EUR, 1.2970s vs GBP, 104.70s vs JPY.
  • AUDUSD breakout above 0.7170s lacking follow-through buying momentum.
  • Large topside option expiries could help USDCAD & USDJPY if Powell disappoints.


ANALYSIS

USDCAD

Negative technical momentum saw the broader USD extend its losses overnight but some notable failures on the part of USD sellers to push it below key support levels (1.1760s vs EURUSD, 1.2970s vs GBPUSD, 104.70s vs USDJPY) now appears to be forcing the marketplace to lighten up on its collective dollar bearishness ahead of today’s FOMC meeting.  Hedging around this morning’s large topside option in USDJPY (1blnUSD at the 105.00 strike) could also be helping to stem the dollar’s slide amid the quiet pre-Fed calendar.  Spot silver is trading down 1.2% as the July futures go off the board and September WTI is bouncing 1% higher following last night’s larger then expected API inventory draw (-6.83mln barrels).

The overwhelming consensus view going into today’s Fed meeting is that the worsening US COVID situation/outlook for the US economy will force the Fed to adopt an even more dovish tone.  While no changes to interest rates, the Fed’s quantitative easing/emergency lending programs, or the Fed’s “not right now” stance on yield-curve control are expected, many market participants are expecting Jerome Powell to start hinting at what a potential change to an “outcome-based” approach to monetary policy might look like (one factor that has arguably been driving USD weakness of late).  Today’s meeting won’t feature another set of economic/Fed funds rate projections (this will come at September’s meeting).

The leveraged funds are positioned poorly for uber dovishness from the Fed today as they remain net long USDCAD from higher levels, but we can’t help but notice the absolutely massive amount of options expiring on the 1.3400 and 1.3500 strikes for Friday (2blnUSD each).  These could ultimately prove magnetic (support USDCAD into week’s end) should Powell disappoint the doves today.
 


USDCAD DAILY

USDCADD_7.24

 

USDCAD HOURLY

USDCADH_7.24

SEP CRUDE OIL DAILY

SEPTCRUDEOILD_7.24


EURUSD

Euro/dollar bulls appear to be using the market’s fourth rejection of the 1.1760s resistance level over the last 24hrs as an excuse to lighten up on long positioning, which has very much been the consensus trade of late.  Almost everyone, from the FX analyst to the leveraged fund community, has been bullish EURUSD; and we think this could set the bar a little too high for Jerome Powell today in terms of delivering a dovish surprise. 


EURUSD DAILY

EURUSDD_7.24

EURUSD HOURLY

EURUSDH_7.24

SPOT SILVER DAILY

SPOTGOLDD_7.24


GBPUSD

Sterling/dollar extended its week-and-half long rally overnight on the back of broad USD selling and continued EURGBP weakness from yesterday, but the market has now stalled at the 1.2970-1.3030 resistance zone ahead of this afternoon’s Fed meeting.  We have to think that the leveraged funds have lightened up on their net short GBPUSD position given the market’s breakout above the 1.2750s on Friday and it’s shattering of 1.2800 chart resistance on Monday, but we think the “pain trade” for this market is still higher and we wouldn’t stand in the way of this rally until we see a notable sign of buyer failure.  Today's Fed meeting could provide an inflection point.

 
GBPUSD DAILY

GBPUSDD_7.24

GBPUSD HOURLY

GBPUSDH_7.24

EURGBP DAILY

EURGBPD_7.24

AUDUSD

The Australian dollar broke above the familiar 0.7170s resistance level in European trade this morning but follow-through buying momentum has been missing as the broader FX marketplace lightens up on bearish consensus USD bets ahead of the Fed.  Last night’s slightly better than expected read on Australian Q2 CPI (-1.9% QoQ vs -2.0%) was mildly supportive for AUDUSD.  Friday’s session features a large 1.2blnAUD option expiry at the 0.7050 strike, which could act as a downside magnet for the market into week’s end should Powell fail to appease the doves today.

 

AUDUSD DAILY

AUDUSDD_7.24

AUDUSD HOURLY

AUDUSDH_7.24

USDCNH DAILY

USDCNHD_7.24


USDJPY

Dollar/yen is trying to bottom this morning as USD shorts trim positions ahead of the Fed, but the market’s momentum is still downward for the moment.  We think there’s a risk that Jerome Powell doesn’t sound dovish enough today in his press conference or that he simply delivers what the market is already expecting; therefore compelling the leveraged fund FX community (who has remained profitably net short USDJPY all this time) to finally take some chips off the table.  It’s also hard not to notice the $2bln worth of option expiries at the 106.00 strike over Thursday/Friday, which could act as a magnet for spot USDJPY prices should we see the above scenario unfold. 


USDJPY DAILY

USDJPYD_7.24

USDJPY HOURLY

 

USDJPYH_7.24

US 10-YR YIELD DAILY

US10YRBONDYIELDD_7.24

Charts: Reuters Eikon

 


About the Author

Erik Bregar Director, Head of FX Strategy at Exchange Bank of Canada

Erik Bregar - Director, Head of FX Strategy

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Erik works with corporations and institutions to help them better navigate the currency markets. His desk provides fast, transparent, and low cost trade execution; up to the minute fundamental and technical market analysis; custom strategy development; and post-trade services -- all in an effort to add value to your firm’s bottom line. Erik has been trading currencies professionally and independently for more than 12 years. Prior to leading the trading desk at EBC, Erik was in charge of managing the foreign exchange risk for one of Canada’s largest independent broker-dealers.

Interested in creating a custom foreign exchange trading plan? Contact us or call CXI's trading desk directly at 1-833-572-8933.

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