Return of the Dollar bulls

The greenback found its strength last week, advancing over 3% to register the first weekly gains after five weeks of decline.

Federal Reserve
Source: Bloomberg

Pullback in the dollar index from 100.39 could have been done at 93.13, ahead of the 38.2% retracement of 79.76 to 100.39 at 92.51.  The USD rebound looks set to continue in the new week with a sustained break of 95.52 resistance. We could see a retest of the big 100 level and the larger bullish trend would likely resume.

The dollar resurgence was not all of its own doing. Last Tuesday’s strong recovery was largely a euro decline after ECB said it will step up asset purchases in May and June ahead of a liquidity lull in the summer.  However, signs of a pickup in the consumer price inflation and Fed Chair Janet Yellen’s reiteration that a rate hike at some point this year is still in the pipeline drew out the USD bulls. FOMC minutes for April more or less ruled out a June lift-off. The consensus remained that September is the timing for the first hike although there is still a risk that the Fed could further delay the increase if the US economy does not shrug off its Q1 weakness. This means upcoming data would continue to drive changes to expectations.

Another bunch of US data slated for release this week would induce volatility in the dollar and other risk markets. We would focus on durable goods orders, new home sales, unemployment claims, a second estimate to Q1 GDP and a pair of sentiment surveys. However, with US traders away for a long weekend, we should see a quieter start to the week before things get more interesting on Tuesday.

China markets looking bullish

This may not be the case in China, where equity bulls are more inwardly-focused. We maintain our view that China A50 remains a buy for further extensions above 14,000 given its relatively low P/E ratio of 12.2 times consensus 12-month average. Wider stops, however, are recommended due to the larger volatility in the Chinese stock markets. It will also be interesting to watch if the Shenzhen shares will continue its incredible bull run. Retail investors generally do not care about valuations, if the stock price rises, they will follow. What will however influence their trading decisions are media news and hearsay. More positive news out from the country, particularly on Shenzhen-Hong Kong stock connect, should keep the bullish momentum humming along.





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