The Sep USD index opened Wednesday at 96.27 and is trading slightly lower this morning after coming off its high at 96.435. Monday’s leg up can be credited to the wave of optimism that came out of the G20 last weekend. Markets were largely expecting a trade truce between the U.S. and China and was satisfied to see an extension of good faith beyond just halting tariffs. China agreed to buy U.S. agricultural products while Trump agreed to ease the bans on U.S. firms selling technology to Huawei. After stopping in to see his old pal, Kim Jong Un, in North Korea, the U.S. president boasted warm relations between the U.S. and its Asian counterparts. This elevated the greenback at the expense of foreign currencies around the world, particularly the Swiss franc, the euro, and the Aussie dollar. However, dollar gains are eroding as the week progresses. The larger macroeconomic picture always beats short-term excitement.
The Fed is still planning a path to rate cuts into the back half of this year. As the market prices in these expectations, the dollar will weaken. A July rate cut is largely priced in, while the stock market is pushing into all-time highs. Typically, stock levels are the main factor in central bank rate cuts. If equity strength persists into the FOMC meeting this month, the Fed may decide to hold rates at these levels until later in the year. This will inflate the dollar and cause retracement in foreign currencies. I am still very bearish on the USD going into Q3 and Q4. Any delay of rate cuts will provide opportunities in the realm of foreign exchange. Particularly the currencies that sold-off on Monday’s action have space to inflate if the dollar comes off later in the year. Given that the Australian central bank just implemented their last installment of rate cuts, it seems the Aussie dollar is in the process of bottoming. Additionally, Australia is in a period of economic growth compared to the slowing seen in other developed economies. I believe the Aussie dollar, the Swiss franc, and the Japanese yen have the largest upside potential when the dollar finally rolls over and establishes an entrenched downtrend.
Australian Dollar Sep ’19 Daily Chart