Fed on track to hike: USD long

Expectedly, Yellen didn't provide anything enlightening yesterday. The market realized the Fed is still on track to hike rates this year, with March being a "live" meeting (although the hike probability is not high by any means for that meeting). Perhaps traders are still remembering 2016 when the Fed didn't hike as often as had been expected. Traders should forget all about 2016! The Fed entered its rate hike cycle, and it will hike again. Traders should also pay less attention to Trump statements. Let's wait for actual implementations of his promises instead. Regarding his USD rhetoric, it's meaningless. If his administration will deliver on his stimulus promises, which I think it will, that will be inflationary and ultimately positive for the US economy, i.e. it will give Yellen & Co. even more reason to continue hiking rates. It will also be important for the Fed to prove it is an independent institution; the US president has no business pressuring his nation's central bank. Everything is playing into the USD long story at the moment. Don't let Trump noise fool you into thinking anything else.

EURUSD Short 15/02/2017

Quick look at NZDJPY: After I chickened out of putting on a NZDJPY long trade post-RBNZ, the pair is looking constructive again. Trendline support still valid. On hold but definitely interesting.

NZDJPY Daily 15/02/2017Open positions as of 15/02/2017 10:19am CET:
EURUSD short from 1.0795, unrealized return: +2.37%

Realized YTD return: +4.34% from 3 trades
Total YTD return: +6.71% from 4 trades

Expect nothing new from Yellen today

Fed chair Janet Yellen will deliver her semi-annual congressional testimony before the Senate Banking Panel today. I expect nothing new from her today. It's too soon since the latest Fed meeting on 1 February to change course, and the dollar is too strong to hint at a March rate hike, in my opinion. I maintain my EURUSD short position. By the way, US National Security Adviser Michael Flynn's resignation is a non-event for FX, ignore it.

DXY Index 14/02/2017Open positions as of 14/02/2017 08:45am CET:
EURUSD short from 1.0795, unrealized return: +1.77%

Realized YTD return: +4.34% from 3 trades
Total YTD return: +6.11% from 4 trades

USD struggling s/t albeit positive jobs data

The US dollar index is struggling not to fall considerably below the 100 handle. It's currently testing its support at 99.43. Looks heavy short-term, but I stand by my USD long call m/t. Verbal interventions from politicians only have short life spans, causing plenty of interim volatility without leading to any permanent changes in market positioning. All things considered, Trump's promised stimulus package is USD positive, thus challenging the president's conviction that the dollar is too strong relative to the currencies of America's trading partners. The only serious challenge for USD longs would be 1) an undermining of the Fed's independence, or 2) a possible G20 accord to weaken the US dollar (G20 meeting in Hamburg in July), but either scenario is unlikely.

Dollar Index DXY 02/02/2017 EURUSD 02/02/2017 DailyDifferent battleground: I'm still confident in my EURTRY short position. As the Turkish lira is finally gaining a bit of momentum I'm looking for a test of 4.0. Merkel meeting Erdogan today. Nothing market-moving will come out of that meeting, but the outcome will be interesting nonetheless.

EURTRY 02/02/2017 DailyOpen positions as of 02/02/2017 9:42am CET:
EURTRY short from 4.0524, unrealized return: +0.83%
EURUSD short from 1.0795, unrealized return: -0.06%

Realized YTD return: +0.7% from 2 trades
Total YTD return: +1.47% from 4 trades

Selling EURUSD at 1.0795

I have nothing new to add to my commentary on Navarro and the US dollar's strength from yesterday evening, but I'm putting my money where my mouth is: Sold EURUSD at 1.0795. This is not a near-term trade as I can see the pair going up to 1.0875 or even higher during the next couple of sessions (depending on Fed today & any Trump comments we might get), but in the medium- to long-term I believe the EUR short story will play out well. Read yesterday's post for details.

EURUSD short 01/02/2017Open positions as of 01/02/2017 9:38am CET:
EURTRY short from 4.0524, unrealized return: -0.56%
EURUSD short from 1.0795, unrealized return: flat

Realized YTD return: +0.7% from 2 trades
Total YTD return: +0.14% from 4 trades

Ignore Navarro comments, EUR short story intact

Trading started out quiet enough today, but after the Financial Times reported on Donald Trump trade adviser Peter Navarro's comments on a "grossly undervalued" euro today, EURUSD quickly shot up from 1.07 to 1.0813. The pair is currently trading at 1.0799.

Let's be reasonable for a moment though: The inflation outlook for the euro zone does not support any immediate EUR strength ("base effects"), Mario Draghi's ECB is still broadly dovish, and the year 2017 brings plenty of political risks for the currency bloc with tricky elections in the Netherlands, France and Germany. On the other side of the Atlantic, the Federal Reserve is prepping for as much as three interest rate hikes that should, in theory at least, support the US dollar. In fact, if Trump's economic stimulus works out well, the Fed might even be inclined to hike rates faster or more often. Let's not forget that central banks are independent, either! Trump and his advisers have no real business telling anybody that their currencies should be revalued higher or lower, and if they do, the recipients of that message have absolutely no obligation to obey mighty Trump's orders (even if they come in form of a Tweet, which to my surprise has worked pretty well for the president so far).

What should a trader make of this mess? We must surely brace ourselves for an increase in two-sided volatility during the next few months to come. Any comment from Trump, Yellen and Draghi will violently and without warning push both EUR and USD pairs in either direction. The same goes for news about populist parties in Europe gaining support ahead of this year's elections. JPY pairs will be affected too, because the Japanese yen is still a typical currency for risk-on and risk-off trades.

Looking just at EURUSD, I believe the EUR has no real supportive story going for it for some time to come. Comments from Trump's adviser team won't change that. The euro zone has lots of homework to do, and a possible trade war with the U.S. won't help, either.

Resorting to technical analysis, it is true that the charts look slightly more supportive after today. In the daily chart above the pair managed to break out of its downtrend, which started in November 2016, and in the monthly chart it even jumped back over the long-term upwards trendline support going back to 2002 (second chart above). In theory, a monthly close above the trendline would signal that the previous break lower was indeed a false break, especially since EURUSD failed to permanently trade below the March 2015 low at 1.0458 (red dashed line).

Everything else is still telling me that the EUR short / USD long story is intact, however. As mentioned above, I don't attach a lot of value to Mr Navarro's comments anyway. It's more significant to me that EURUSD further decoupled from interest-rate differentials today (I think it will revert back soon) and that speculative EUR shorts ("smart money") have declined yet another week. That means market positioning is less extreme, thus permitting another extended move lower.

Open positions as of 31/01/2017 9:17pm CET:
EURTRY short from 4.0524, unrealized return: -0.26%

Realized YTD return: +0.7% from 2 trades
Total YTD return: +0.44% from 3 trades