Are we about to see the next leg higher in the USD?

We are staring at a slightly stronger open here in Asia, with our call for the ASX 200 printing a new high in this two-month rally at 5775 and the Nikkei 225 at 19,585, eyeing a break of the December highs.

Source: Bloomberg

There may have been a potential change in the landscape last week, specifically - a further pullback in the USD. If we look at the USD index (on the weekly chart) we can see a failure to close below the priors week low, which would have printed a bearish outside week reversal and suggested a potentially deeper correction. Looking at the price action that failed to materialise with strong buying into the latter stages of Friday’s US trade and one questions if we are now likely to see further upside this week in the USD. At the very least I expect consolidation, but I question if we could be facing another leg higher from here.

The US payrolls report on a net basis were taken as a positive for the USD, with the greenback trading as an out-and-out cyclical currency for some time. The fact we saw a fairly strong sell-off in the US ten-year treasury on the jobs print, with the yield moving from 2.33% to 2.41% and with five-year inflation expectations remaining firm at 2.06%, suggests traders had gone into the US payrolls report positioned for a far worse-than-consensus 175,000 expectation. Strong wage data was clearly a USD positive too.

The unemployment rate rose modestly to 4.7%, however this was a function of the labour force and the household survey increasing 184,000 and 63,000 respectively, with the net result being a nice increase in the labour force participation rate to 62.67%. I will be happy to buy USDs this week, but the event risk is real, with Janet Yellen speaking on Thursday (along with a number of other Federal Reserve speakers this week) and US retail sales the highlight on the economic data front.

AUD/USD traded lower on Friday and once again the catalysts this week come from the US, as opposed to the Australian data flow. If I take the timeframe out somewhat (to the weekly chart) we can still see AUD/USD printing higher lows, but there is huge support kicking in around $0.7150, with the bulls happy to step in and bid up the pair here. This is the line in the sand and until the $0.1750 area is broken we can’t be talking about a test of 70c, but on the same token (and while this is a longer-term issue) the bulls really want to see the December highs being taken out at $0.7524 before getting excited about opening up better upside. I was bearish USD/JPY last week after the close through the neckline of the December double top, but Friday’s reversal has clearly shown that call was wrong and as they say, ‘if the facts change, I change’. USD/JPY could be ready to make an assault on the ¥118.00 to ¥119.00 area again and is firmly on the radar.

On the commodity front, there has been some selling of precious metals, although I remain positive on the platinum trade, with price action looking quite upbeat, showing the bulls were happy to drive prices higher on Friday after falling to $962. A break of $980 this week and I would expect a strong move into $1000. Gold has not seen the same sort of love as platinum, with price closing close to the session low on Friday, and gold traders reacting to the strong USD and selling in US fixed income. US crude traded in a range of $53.32 to $54.32 and the bulls desperately need to see a convincing close above $55.00 this week. Iron ore futures fell 1.4% on Friday.

So it looks as if (at this stage) that we should see the ASX 200 rally for a fifth day, with the ADRs suggesting modest weakness in BHP, while some support is likely in energy and the banks. It should be a fairly lively week, with most of the catalysts for markets coming from the US and Chinese economic data and much focus on a scheduled speech from Donald Trump. Many will be watching for a break of 20,000 on the Dow, although there have been calls that this is unlikely to happen as we may have seen exhaustion in the move. One for the radar, price will reveal all.

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