In the FX market, the Dollar has weakened slightly against most currencies.
For several weeks now, the market has been undecided in its direction without defining any clear trend and moving rangebound. The traditional market drivers of the foreign exchange market, such as monetary policy and interest rates, are no longer a differentiating element, since central banks for the main currencies adopt similar policies of interest rate cuts and liquidity injection through purchases, in unlimited cases, of sovereign and corporate bonds. There is no comparative advantage in this regard between the countries of the major currencies.
At first, during the crisis, the Dollar strengthened abruptly for merely technical reasons - the increase in the cost of its financing in short-term swaps. But now, that obstacle has disappeared thanks to the immediate intervention of the Fed, providing the necessary and sufficient liquidity.
If we compare the pre-crisis scenario to the current one, the currency that has most significantly modified its monetary policy is undoubtedly the US Dollar with a rate cut that has lowered the yield on its 10-year bond by 150 bp. Add on top of this a liquidity injection of such magnitude that the Fed's balance sheet has tripled in just one month.
The intention of the North American government, clearly manifested, is also to promote a weaker Dollar that facilitates and helps the competitiveness of its exports. In recent years we have learned that the influence of the current government on the policies of the Fed is real and valid.
In summary, there are many favorable circumstances for a progressive weakening of the Dollar in the future, say most market analysts.
Economic data will increasingly influence the decision-making of market participants in this regard. Tomorrow the preliminary data on the GDP of the first quarter of the USA will be released; it is expected to be -4%. Most voices say that the full effect of the country's financial closure will not be noticed yet, but whatever the data will be tomorrow, the next will undoubtedly be worse. In a market that is driven by expectations, this will be a determining factor in the price of the North American currency.
Another element that has favored the relative Dollar strength has been demand from emerging countries that have seen their currencies weaken sharply with the crisis, but this factor has lost steam in recent days. There are talks in the market that countries like Mexico could benefit from a hypothetical process of deglobalization that could begin if it decides to sever ties with China as a consequence of the pandemic expansion.
We have seen how the USD/MXN price has failed to break higher in three attempts in recent weeks, giving rise to a triple top formation that, if confirmed, would open a bearish path of about 400 pips lower.
In this hypothetical scenario of a bearish Dollar, one of the most sensitive pairs is USD/JPY. Here we observe how the support at 106.90 has recently broken downwards, clearing the way, from a technical analysis perspective, towards the 105.00 zone.
Another clear example of a weak Dollar is seen in USD/CAD. Despite the weakness of Crude Oil, an asset highly correlated with the Canadian currency, the CAD has strengthened against the US dollar.
Canada could also be favored in a deglobalization scenario, also for having been less affected in contagions and the pandemic spread. USD/CAD, as we see in the chart, is developing a bearish triangle pattern that needs a daily close below 1.3857 to confirm.
Tomorrow's meeting of the Federal Reserve, although no further monetary policy action is expected, could be decisive if they express a determined intention to maintain their expansionary policy in the future.
By: Miguel A. Rodriguez
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