Forex Institutional Research: Societe Generale FX Daily

Forex Institutional Research: Societe Generale FX Daily

Key quotes from the Societe Generale FX report: 

Head fake or imminent FX headache

dxy

The dollar’s slide was interrupted yesterday as angst about the global economy overtook relative real yield trends as the dominant driver. Oil was down, the dollar bounced and high-beta and commodity-sensitive currencies corrected. Current FX trends are overwhelmingly the result of positions being taken off, rather than fresh ones being put on and that encourages slightly chaotic moves. Stephanie Aymes and her Technical Analysis team warned yesterday (here) that “The Dollar Index is now at the ‘make or break level’ of 92.50/92.10, the lower part of the broad 1- year consolidation zone which intersects the upward channel limits in force since 2008 and 2011 lows. More importantly, 92.50/92.10 corresponds to the neckline of the Double Top pattern the Index has been tracing after it failed to overcome the stiff resistance of 100.40. Should the Index break durably below 92.50/92.10 (weekly close) it would imply a potential down move towards the projected potential which is located near 85 levels.” I’ve never made a secret of my inability to draw straight lines but we’ve either had a ‘fake break’ on an intra-week basis, that leaves the range, and the dollar’s uptrend intact, or we’re setting up for a bigger dollar fall if we end below these key levels at the end of the week.

This a time for head-scratching rather than jumping to conclusions. Friday’s US payroll data may help unfog the US economic outlook a bit (though they may just continue to confirm that this low wage-growth, low productivity jobs ‘boom’ goes on). But either way, the US data will determine the weekly close in DXY and therefore provide food for thought for the technicians.

In the meantime, we’re sticking with shorts in EUR/RUB, GBP/NOK, USD/CAD because we believe that the oil price will hold up; we’re still short NZD/USD and we’re still short DKK/SEK. And yes, we’d still, rather wait to get long USD/JPY closer to 100 and short EUR/USD closer to 1.20. The second chart shows USD/CAD which has fallen faster than the oil price bounce alone would seem to justify. The CAD bounce was always about valuation as much as oil-correlation however.

NZD has fallen a bit further after overnight labour market data (strong employment, higher unemployment, soft wage growth). NZD looks too high relative to relative rates will look vulnerable if NZD/JPY breaks 72.5, and is our favourite G10FX ‘sleeper’ trade to position for the next round of weaker Chinese data.

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