Dollar Lacks Follow Through Buying to Extend Rally, But Stays Firm

Dollar edges mildly higher in early Asian session today but quickly turned mixed. The greenback is somewhat supported by comments from Fed officials. St. Louis Fed President James Bullard echoed some other officials and said Fed could start winding down its $4.5T balance sheet later this year. But in that case for Bullard, it would become less necessary to raise interest rate. On the other hand, New York Fed President William Dudley said on Friday that shrinking the balance sheet would only prompt a "little pause" in tightening.

Fed balance shrinking should be considered in March projections

We’d like to remind our readers that Dollar suffered selloff last month when Fed’s new economic and interest rate projections disappointed. That was, in spite of recent solid economic data (except Friday’s NFP of course), Fed maintained projection of three hikes this year and in 2018. And the minutes released last week showed FOMC members have already discussed the topic of unwinding the balance sheet. That is, Fed’s rate projection should have that "little pause" Dudley mentioned considered. In other words, the talk of balance sheet normalization shouldn’t alter Fed’s rate path.

Fed chair Janet Yellen will speak today and markets will look into hints of her view on rate and balance sheet. But we’d like to maintain our view that economic data including inflation and employment will remain one of the two main driving forces in Fed’s outlook. US President Donald Trump’s implementation of his election promises of fiscal stimulus would be another factor, and possibly the more important one.

BoC rate decision to highlight the week

Bank of Canada rate decision on Wednesday will be a major focus this week. BoC is widely expected to keep interest rate unchanged at 0.50%. The tone of the statement could remain slightly dovish in spite of improvements in economic data. Nonetheless, Canadian Dollar will likely follow more on oil prices as WTI crude oil could be heading back to 55.24 resistance due to geopolitical tensions.

In addition to that, UK CPI and employment, German ZEW, China CPI, PPI and trade balance, Australia employment, US CPI and retail sales will be closely watched in a holiday shortened week, ahead of long weekend.

Here are some highlights for the week ahead

• Monday: Australia home loans; Japan economy watcher sentiment; Eurozone Sentix investor confidence; Canada housing starts; US labor market conditions index
• Tuesday: Australia NAB business confidence; UK CPI, PPI; German ZEW; Eurozone industrial production
• Wednesday: Japan machine orders, PPI; China CPI, PPI; UK employment; BoC rate decision; US import prices
• Thursday: New Zealand business NZ manufacturing; Australia employment; China trade balance; Swiss PPI; German CPI final; Canada manufacturing sales, new housing price index; UK PPI, jobless claims, U of Michigan sentiment
• Friday: US CPI, retail sales, business inventories

AUD/USD Daily Outlook

Daily Pivots: (S1) 0.7480; (P) 0.7513; (R1) 0.7531; More…

AUD/USD’s fall from 0.7748 continues today and breaches 0.7490 support. The development indicates that rise from 0.7158 is already completed at 0.7748. And, near term trend has reversed Intraday bias stays on the downside for 0.7144/58 support zone next. On the upside, above 0.7351 minor resistance will turn bias neutral and bring recovery. But upside should be limited by 0.7586 support turned resistance to bring fall resumption.

In the bigger picture, we’re still treating price actions from 0.6826 low as a correction. And, as long as 38.2% retracement of 0.9504 to 0.6826 at 0.7849 holds, long term down trend from 1.1079 is expected to resume sooner or later. Break of 0.6826 low will target 0.6008 key support level. However, firm break of 0.7849 will indicate that rise from 0.6826 is developing into a medium term rebound, rather than a sideway pattern. In such case, stronger rise should be seen to 55 month EMA (now at 0.8142) and above.

Economic Indicators Update