Focus of the day:
"For the past two months the USD has been stuck in correction mode. As we highlighted, lengthy consolidation periods have been fairly common in structural USD bull markets.
We are starting to see signs that the consolidation period might soon be turning. The rationale for our view is threefold, as follows:
1) Recent comments from ECB officials significantly reduce the risk of an early “tapering” of asset purchases.
2) The stronger-than-expected tone of US housing starts data might signal the beginning of the reversal in the US data momentum that trend our economists project.
3) Lack of inflation and FX strength are biasing monetary policy developments in G10 in an increasingly dovish direction.
How to trade it?
In an anticipation of a resumption of the upward trend in USD we favor re-entering EURUSD shorts. The recent clearing of short EURUSD positions likely established below 1.10 highlighted by the most recent CFTC data suggests there is potential for a renewed EUR downturn. A risk to our view is the overall high level of speculative EUR shorts, but elevated levels of shorts historically have not stopped currencies from weakening in a clearly defined trend, as seen in the case of JPY in the 2012-2014 period."
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