The dollar will be hampered by doubts surrounding Federal Reserve policy and concerns surrounding a more protectionist US economic policy. Although yield spreads will continue to provide dollar support, there is an important risk that key support on approach to 111.50 will be tested.
The March US University of Michigan consumer confidence index strengthened to 97.6 according to the flash reading from 96.3 in February as the current conditions index strengthened on the month. There was, however, a decline in inflation expectations with the 1-year expectations declining to 2.4% from 2.7% while the 5-year rate dipped to 2.2% from 2.5%.
The decline in inflation expectations dampened expectations that the Fed would tighten monetary policy more aggressively and pushed the dollar lower with a break below the 113.00 level.
Minneapolis Fed President Kashkari explained that he dissented from Wednesday’s FOMC decision to raise interest rates because the Fed is falling short on inflation. He also wanted a detailed plan on when and how to normalise the balance sheet before making a commitment to raise interest rates.
The latest COT positioning data recorded an increase in short yen positions to 71,297 contracts in the latest reporting week from 54,700 previously and this was the largest short yen position for 8 weeks. The data shows the position just before the Federal Reserve interest rate decision and there is likely to have been a reduction in shorts since then given the dollar’s decline over the past few days. The overall bias will still maintain the potential for a squeeze on short yen positions.
The final communique issued after the G20 meetings held in Germany on Friday and Saturday maintained references that competitive currency devaluations should be resisted and also continued to warn against disorderly FX markets.
There was, however no agreement on keeping global trade free and open with the reference to resisting all form of protectionism which had been included in previous statements removed from the communique.
US Treasury Secretary Mnuchin stated that the relevant part of the G20 statement is on correcting trade imbalances and, although he was also generally positive surrounding the overall meetings, there was clear friction between Germany and the US over trade issues.
A difficult meeting between President Trump and German Chancellor Merkel also maintained the threat of underlying friction which could have a wider destabilising influence.
In a commentary following the G20 meetings, China warned that it would counter any US trade penalties and there was a generally more cautious tone surrounding risk appetite on Monday.
Activity in Tokyo was undermined by a market holiday with narrow ranges prevailing. European stocks opened lower, although moves were still relatively restrained.
There was no major change in US Treasuries on Monday with the 10-year yield just above 2.50%. USD/JPY found support close to 112.50 and rallied to the 112.80 area as caution prevailed. Overall yield spreads should still provide important US dollar support.
USD/JPY Daily Chart