Dollar Troubles Persist as Yen Gains Amid U.S. Political Turmoil

  • Euro long-term bearish bets plunge to lowest level since 2009
  • Volatility jumps as one-sided market responds to spot moves

TD's McCormick Sees U.S. Creating Dollar Discount

The Bloomberg Dollar Spot Index was under pressure for a sixth day, its longest losing streak in almost two months, as the turmoil surrounding President Donald Trump’s administration boosted the appeal of risk-off trades.

The yen rose versus all its Group-of-10 counterparts on haven demand and stocks globally traded in a sea of red, as Trump faced the deepest crisis of his presidency. Leveraged accounts kept shorting dollar-yen after the the pair dropped below the 113.00 level, according to foreign-exchange traders across Europe. Short-term accounts were seen fading the dollar move as it was regarded as overdone, said the traders, who declined to be identified as they weren’t authorized to speak publicly.

For all the bearishness in dollar-yen, a technical bullish signal is in the making and suggests caution to yen bulls in the medium-term. The 21-daily moving average has risen above the 55-day one, a development that historically favors a long dollar-yen position when the lines cross.

On top of that, medium-to-long term yen bulls should also take into consideration that the April lows respected not only the 233-daily moving average that defined the lows of the move this year, but also the 61.8 percent Fibonacci retracement of the gains since the U.S. elections, suggesting that the drop since January remains corrective in nature.

  • BBDXY was 0.1 percent lower at 1208.92 as of 11:20 a.m. London time, versus 1206.99-1210.43 range
    • The Australian dollar led losses among majors versus the greenback as 21-DMA clearly defines the topside for now
  • On dollar-yen, looking back at a 20-year period backtest of a vanilla strategy that goes long when the 21-DMA crosses 55-DMA and closes the position when the opposite happens, gives a win ratio of 41.5 percent with a total positive return of 16.5 percent. On the last occasion such a bullish signal came in place on Oct. 11, the dollar rose 2.3 percent within just over two weeks and went on a total run of 15 percent
  • Swiss franc rose against all G-10 except the yen on haven demand
  • The euro climbed to a fresh high at 1.1122, just seven pips shy of resistance by the 61.8% Fibonacci retracement of its May 2016-January 2017 drop; the medium-term outlook remains euro-supportive as the common currency has breached through resistance by weekly trendline capping for the past year and now trades comfortably above the 55-weekly moving average, currently at 1.0920
    • Notion of fewer downside risks in euro-dollar was also painted through options markets: euro calls trade in premium on tenors up to two months, while risk reversals on the one-year tenor hit their highest level since 2009
    • Looking at a comparison between the spread of U.S. and euro-area economic surprise indexes and the euro-dollar spot rate, further gains for the common currency may be in place (see chart)
  • The pound rose by as much as 0.3% to 1.2958 high, mostly on the back of dollar weakness rather than optimism stemming from the latest U.K. wage data
    • Even though unemployment dropped to its lowest level in more than four decades, growth in real earnings remains unsupportive of a BOE hike
  • Implied volatilities across G-10 land rebounded sharply and in a rather disorderly manner after demand for short-vega strategies resulted in a one-way trade following the French elections
    • One-week in EUR/USD stood around 2.5 vols higher compared to its lows on Monday while the back-end of the curve was also supported
    • Leveraged names are seen unwinding vol shorts while some demand has emerged from macro names to add long vega exposure on the one- and two-year horizon: traders

— With assistance by Love Liman

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