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Trading Currencies: The Fed to take a leaf from the RBA?
Mitrade Team
2020-07-16 56

‘Risk on’ continues to (somehow) outpace the risks of the second wave. The confirmation that California is heading back into lockdown has to be seen as a future risk to the US economic recovery considering the State is the 5th largest economy on the planet.

 

But as we have seen in the post-COVID trading world, traders latch on to any ‘good news’ as a reason to ‘pin the ears back’ rather than the massive negative news that is the COVID crisis.

 

A mixture of vaccine trial results and a ‘slowing’ (and we say that very tentatively) of COVID cases has seen risk currencies back in the ascendancy over the past week. This point in itself is interesting considering the moves by Washington to follow the UK, Canada and Australia in having a strong determination on Hong Kong’s status, further escalating tensions with Beijing. Big geo-political risk here.

 

However, if we dive deeper into the ‘risk on’ moves, there is other fundamental data of the past week that is driving down the USD, and none more so than a very, very dovish FOMC.

 

FOMC board member (and rumoured to be the Democrats’ nominee for the next Fed Chair) Lael Brainard called for ‘new policy tools’ in combating the COVID crisis in the US and that monetary policy “will have to shift from stabilization to accommodation.” She also suggested that yield curve control similar to that taken by the RBA could help control policy along with ‘freezing’ the Fed funds rate at 0% until inflation reaches 2%. Big accommodative comments which are clearly USD negatives under fundamental theory explain a lot of the USD’s weakness.

 

Currency positioning

 

Two risk pairs that have changed significantly over the week are EUR and AUD.

 

EUR/USD broke out of a small downtrend to find itself back above $1.14 and hit $1.141, which is a new monthly high. Clearly the USD side is driving this rise but it is being helped by the EU’s May industrial production which rebounded +12.4% month on month up from a -18.2% collapse in the previous month.

 

AUD/USD looks like testing the very strong resistance level of $0.70 in the coming days. Bears have defended this point with real zeal and the upcoming labour force data will be a test of their resolve. At $0.6978 that point is coming fast; watch iron ore prices if they make new yearly highs again this week, but $0.70 is under even more pressure.


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