Why Has the Dollar Rally Stopped Dead in its Tracks?

Market Drivers February 6, 2017
AU Retail Sales miss
EZ Investor confidence improves
Nikkei 0.31% Dax 0.08%
Oil $54/bbl
Gold $1224/oz.

Europe and Asia:
AUD Retail Sales -0.1% vs. 0.3%
EUR EU Sentix 17.4 vs. 16.1

North America:
No Data

It's been a quiet start to week's trading with most of the majors contained to very narrow ranges. After a slightly disappointing NFPs on Friday which saw wages grow only 0.1% casting doubt of the prospect of Fed rate hike in March, the dollar remained weak against the yen but rebounded somewhat against the euro.

Both USD/JPY and EUR/USD remain at key levels as the week begins with the later struggling to push through the 1.0800 figure while the former teeters within striking distance of the 112.00 level. A break of 112.00 to the downside in USD/JPY or 1.0800 to the upside in EURUSD would signal a more significant correction of the dollar rally indicating that the greenback is no longer a sure way bet to rise this year.

The recent weakness in the buck could be attributed to a variety of factors – a deceleration of US economic data, a rocky start of the Trump administration that has created fears of instability amongst investors and the still rather cautious tone from the Fed. But perhaps the biggest reason for the correction in the dollar has been the stall in US interest rates. With fixed income markets no longer exuberant about the prospect of US growth the dollar has lost its primary catalyst for appreciation. Until rates perk up, the greenback is likely to remain subdued.

With no US data on the docket today, price action could remain lackluster for rest of the day with the focus shifting towards commodity dollars which have remained resilient relative to the rest of the majors. Both RBA and RBNZ will hold meetings this week and both central banks are expected to remain neutral in their bias, but given the relatively strong performances of their economies so far, traders will be looking for any clues to any possible tightening as the year proceeds.

Both kiwi and Aussie are approaching swing highs, as the interest in the dollar wanes and the carry trade has come back into vogue. Any slight hint by the RBA or RBNZ that the tightening cycle might resume will only accelerate those trends and could push both pairs to fresh near term highs as the week proceeds.