Dollar Drops Into Red for 2017 as Stale Longs Bail

  • Intervention exacerbates dollar drop before December jobs data
  • Strong dollar advocate a candidate for key post in Trump admin

Deutsche Bank's Chadha Sees U.S. Dollar Rising 8-10%

The dollar fell the most since the U.S. election, dropping the greenback to levels not seen since mid-December as at least two central banks took steps to rein in a dollar which rose to a 14-year high earlier this week; foreign exchange flows were brisk as traders dumped stale long positions amid a cascade of stop-loss selling and as markets searched for equilibrium levels at the start of the year.

The dollar was -1.1% on the day after dropping as much as 1.4% as measured by the DXY dollar index. The dollar was down against all of G-10 peers and most emerging market currencies, the greenback’s appeal further undercut by the Treasury 10-year yield, which fell more than 10 basis points before steadying. Still, for 2017 the dollar is down just 0.7% from its Dec. 30 close, with traders and analysts not yet rushing to change their 2017 outlooks based on less than a week’s worth of trading.

  • Intervention by Mexico’s central bank to curb peso losses after the currency fell to a record added to dollar woes that began overnight when China took steps to underpin the yuan, fueling spillover gains into other Asian and emerging market currencies
  • The drop reflected long USD positioning, a trade that’s been popular since the election, traders and analysts said; “this is a squeeze in positioning rather than a reversal. Most of the metrics we track show the USD grossly overvalued to short-term drivers,” said Mark McCormick, head of FX strategy North America at TD Bank.
  • “Nothing fundamentally really has changed,” said Shaun Osborne, global FX strategist at Scotiabank; Osborne noted that David Malpass, a former economic adviser for the Reagan and George H.W. Bush administrations, is the leading candidate to be Trump’s pick for Treasury under secretary for international affairs; Malpass has been “generally a ‘strong dollar’ advocate in the past,” Osborne said
  • USD/JPY fell to a low at 115.22 amid stop-loss driven selling on the break of the 115.58 low from overnight, price action was choppy as weak longs threw in the towel, a trader in New York said: USD may find bids under 115.00, a trader in London said
  • EUR/USD rose as high as 1.0615, its highest since Dec. 30; further gains may be slowed by offers above 1.0635, the trader in London said; earlier, EUR briefly traded under 1.0500 as USD pared its drop
  • Market focus now shifts to the December U.S. jobs report due Friday; est. for NFP to rise 175k vs 178k prior reading; Thursday, data showed weekly jobless claims fell to 235k, the lowest since mid-November, while the ADP employment report showed private payrolls rose 153k in December vs est. 175k
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