Adam Button breaks down correlations in forex markets.
The Aussie dollar is the biggest forex loser after Q2 GDP showed a bigger than expected contraction, sending the country into its first official recession in 30 years.
The U.S. Dollar is up against all currencies, with the exception of the New Zealand dollar. The euro touched 1.20 only to lose a full cent in a wave of dollar buying on Tuesday but nothing could dent the enthusiasm in equities.
Discreet words of concern from two ECB board members about currency strength were partly behind the drop. One day after U.S. ISM manufacturing trounced expectations, the U.S. August ADP employment on private payrolls rose by 428,000, well below the expected 1.17 million.
Profit taking was the likely culprit of the quick turn in the U.S. dollar on Tuesday. EUR/USD touched 1.20 for the first time since May 2018 but that likely kicked off some sell programs due to the crowded nature of the trade and the relatively quick move from 1.08 in late May.
EUR/USD retreated all the way to 1.1845 and the dollar buying spilled over into the rest of the FX market for a time. The turn was another respite for a dollar that continues to rest of the brink of long-term lows.
Comments from Fed Governor Brainard highlighted why. She said the Fed will need to do more in the months ahead and highlighted a playbook that included bond buying, forward guidance and even yield curve control.
The stock market continued to cheer low rates as the new month got underway. Stabilizing or falling cases of Covid-19 in the United States is adding to enthusiasm as people increasingly look towards the post-pandemic world where the virus is gone but the legacies of easy central bank and government money continue.
It's tough to imagine a blip in economic data shaking confidence in that trade at this point but there are indicators of extreme greed, like the put-call ratio that are warning signs. This is a time more than ever to watch technicals.
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