Morning Commentary: Many Paths Lead To A Stronger Dollar

The dollar's gains this year have led to a lot of FX intervention, the rebalancing of which will support the dollar.

The Swiss National Bank alone has sold 81 billion francs since the beginning of March.Thirty-five percent its reserves are held in dollars. The SNB buys EUR/CHF, so that's a lot of EUR/USD to sell. While SNB intervention may be the biggest, it's not the only operation underpinning dollar. Many central banks are fighting currency depreciation. Given the huge extent of many emerging-market currency drops, interventions are probably being conducted on a big scale. Unless central banks are content to see reserves fall, and few usually are, they will have to recycle dollars sold and buy them back versus liquid currencies like euro....

While that balances the books, it supports the dollar against the most heavily traded and watched currencies, putting pressure on speculators betting EUR/USD will rise.

Watch 1.08150 for brake or intraday bounce.

Good Trading,


15:34 GMT Update

EUR/USD is down slightly on the day but there's little to suggest it will break out of the broad 1.0630-1.1150 or even the tighter 1.0720-1.1020 range anytime soon. Broad based U.S. dollar buying is weighing down the pair today, but yen selling drove EUR/JPY sharply higher offset much of that influence.

The dollar's gains are being driven by a rise in U.S. rates as eurodollar and fed funds futures prices trade mostly lower, and could remain heavy until Fed Chairman Powell speaks Wednesday. Powell might push back against expectations for negative rates, which could buoy the dollar. Investors seem to still be leaning toward negative rates, though, as the pull back in eurodollar and fed fund prices is minimal, which could eventually erode today's dollar gains. Any EUR/USD upside could be limited by increasing uncertainty over the recent German court ruling.

Options suggest EUR/USD's range won't break. Hedging for near 12 billion euros of options expiries this week, should help keep range trading intact. Unless Powell surprises investors Wednesday with a nod to negative rates EUR/USD ranges should hold.

Dominik Stone

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