Welcome back to On the Daily, where we contextualize economic data and market moves using our research process. Let’s start by looking at major FX moves versus the dollar:

Across the board, the dollar has been and continues to strengthen versus the rest of the world. This view is confirmed by our Currency Bloc analysis:

The outflows from the Yuan Bloc have been huge. A good way to think about this is this conceptual chart from Nordea research:

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Over the last month, USD liquidity has indeed begun to go lower, putting pressure on major currencies versus the dollar. This might be a sign of things to come if the Federal Reserve gets to a taper sooner than expected. Looking at the FOMC minutes released today:

“Various participants mentioned that they expected the conditions for beginning to reduce the pace of asset purchases to be met somewhat earlier than they had anticipated at previous meetings in light of incoming data. “

In our view, the current price action could be a harbinger of things to come if US liquidity relative to the rest of the world continues to decline. History confirms this view:

As we can see above, the reduction of USD liquidity over the last tapering led to a steady decline of all major currencies & commodities versus the dollar. We think a similar dynamic is in place today. Given this  backdrop, EURUSD has once again started its downwards trend:

As a refresher on our lenses:

  • Trading Range: These ranges represent a trading bank within which a currency should trade based on multiple market factors. If we are long- prices above the upside range indicate the asset is expensive, and prices below the downside range suggest that they are cheap and vice versa if we are short.
  • Year-to-Date Returns: This is the price performance of a given currency over the course of the current calendar year, in percentage terms. We also compare the current price to the 52-week high and low for reference.
  • Price Momentum: This looks at cumulative rolling returns for a selected lookback period.  Positive momentum is good if we are long and bad if we are short. 
  • Implied Volatility Discount/Premium: This tells us what the market expects in volatility relative to the history of volatility. If we are long a currency, we typically want market implied volatility to be higher than historical volatility and vice versa if we are short.

As a reminder- it is not just enough to have the technical tools we provide here daily. You need to know the fundamental developments in markets that are driving these moves promptly. Head to https://www.fxdd.com/mt/en to get access to our research and analysis!