Dollar Starts Week Defensive as Euro, Canadian Dollar Advance

  • Empire index adds to string of disappointing data in U.S.
  • Euro political tensions ease after CDU win, Macron inaugurated

Dollar Weakens as European Economy Picks Up Steam

The dollar was on a defensive footing at the start of the week, weighed down by another round of subpar economic data and by gains in resource-sensitive currencies as crude oil rose to its highest since late April.

The greenback, lower versus most of its G-10 peers, was down for a fourth day, with the Bloomberg dollar index nursing losses of about 0.2 percent after dropping to its lowest since April 26. Dollar selling in the session was seen from fast money accounts adding to USD shorts, while flows were modest, traders said.

  • Traders are dissecting, and trying to balance, several themes that have conspired to undermine the greenback. The dollar fell to its low of the session after the Empire manufacturing index dropped to -1.0 from the prior month reading of 5.2 and vs expectations of 7.5. That data came on the heels of below-estimates retail sales and CPI data released Friday. The dollar gained little consolation from the National Association of Homebuilders’ housing market index, which rose to 70 in May, topping estimates for an unchanged reading at 68
    • Broad IMM positioning in USD is “well balanced,” so a quiet data week in the U.S. is likely to support more sideways trading in the dollar, BMO strategists led by Greg Anderson write in note 
  • Adding to the dollar’s woes, West Texas Intermediate crude rose as much as 3.8% to $49.66/bbl, approaching resistance at its 55-DMA near $50.00/bbl. Saudi Arabia and Russia, OPEC’s two largest producers, said they were in agreement on the need to extend production cuts for another nine months in a continued effort to trim inventories which have depressed prices. The Canadian dollar advanced toward 1.3600, its best level vs the dollar in two-and-a-half weeks, before paring its gain
    • TD strategists say that momentum is turning for USD/CAD and they continue to favor a break below 1.3500; “near-term direction for the pair will hinge on whether market participants start to buy into the oil story ahead of the OPEC meeting later this month”
  • At the same time, EUR/USD rose to its highest in a week as the euro gained vs a majority of its G-10 peers. The common currency resumed a climb that began ahead of Emmanuel Macron winning the vote for president of France. The euro gained comfort from an unexpected victory for Angela Merkel’s CDU party in a regional election, a result that suggested a possible easing of political risks as Germany heads toward a general election
  • EUR/USD slightly pared gains after rising as high as 1.0990; the shared currency plowed through offers at 1.0970/80 before further supply capped gains. EUR may find option-related supply ahead of 1.1000, where a large option expiry rolls off later this week. Additional offers are in place above 1.1020, with stop-loss buy orders above 1.1030, said traders familiar with the transactions who asked not to be identified because they are not authorized to speak publicly
  • USD/CAD fell to 1.3602, its lowest since April 27, as WTI climbed to its session high; CAD relinquished some of its gain as crude oil’s advance was pared by mid-morning, and USD/CAD settled near 1.3645. The USD may find support ~1.3600 from a late December high at 1.3599; risk may be that overhang of USD longs starts to unwind, opening potential for decline toward 1.3530 low from April 27
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