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USD Litmus Test

USD Litmus Test

Wobbles in sentiment and  a subsequent run of slightly softer US data weakened the USD in the first weeks of 2016. Despite analysts and interest rate markets suggesting the Fed will defer it’s tightening timetable – and possibly cut rates (!) – the Fed thinking as revealed  in its most recent meeting minutes appears determined to lift rates, albeit in a market and data sensitive way.

Disagreement between market pricing of future interest rates and the Fed’s dot plot indications of rates at the end of 2016 increased with the fall in sentiment. However, recovering asset prices, reflecting improving risk appetites, have seen the USD turn. An important question  for traders is the nature of the turn – dead cat bounce or resumption of USD strengthening?

Further complicating the picture are the actions of the ECB, BoJ, and to a lesser extent the PBoC. The stimulus programs and subsequent currency weakness are part of market thinking. Determining how the USD will react against EUR, JPY and CNH is clouded by this market knowledge, as trader positioning around these ideas is hard to determine.

Traders looking for pointers to possible USD moves may turn to USD/SGD. The Singaporean economy is stable, expanding at 2 % with inflation running around 0.3 % at the latest reads. While its electronics industry is in the doldrums, retail sales are growing at 2.9% pa and the latest PMIs indicate modest expansion overall. And of course, Singapore has a stable and effective government and strong rule of law.

A stable economy and current low growth means some traders will view SGD as a neutral proposition – and therefore a good gauge of real USD momentum. The daily chart tells the story:


The big move is the sell-off that began in the first week of 2016. In the last two weeks a rally lifted the pair to the 38.2% retracement level. USD/SGD is about to indicate to  traders the near term direction of the USD.

A break above 1.4100 would clear the retracement level and see traders looking for moves higher, pointing to a resumption of USD strength. However, failure at the current levels would give comfort to the dead catters, and a potential further slide in USD.

Alert readers will have picked up a possible trade, buying USD/SGD on a stop entry at 1.4110, with a stop loss around 1.4075. The 61.8% retracement level around 1.4220 is an initial target, with potential for moves to test the highs around 1.4444.

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