The Retracement Test

Often times the scope of the retracement tells you more about the trend than the initial moves. That was the case in the US dollar Thursday as it lagged after several days of strong gains. The Canadian dollar was the top performer. Chinese CPI is due later on a follow up to the dismal trade figures yesterday. Friday marks the final day for non-Premium members to lock in the existing fees before prices rise next week for all packages. More details here.

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The early theme in trading Thursday was disappointing Chinese trade data but it later morphed into a broad US dollar pullback.  The scope of the pullback was telling. For instance, NZD/USD had fallen for seven straight days in a 220 pip decline but it bounced just 40 pips. Cable was higher for the second day but the bounce has been limited to 150 pips after a 900 pip dive.

It's a similar story elsewhere and it underscores the lack of panic from dollar bulls. Taking a look at the broader US dollar picture, the Fed has been a disappointment, economic growth has repeatedly been downgraded and politics are in the sewer and yet the US dollar has outperformed every G10 currency over the past six months except JPY and NZD.

What has kept the US dollar bid is potential. America remains a dynamic economy full of potential, the Fed still wants to hike and Washington is likely to loosen the purse strings after the election. Even if just one of growth, rates or politics improves, there is plenty of upside in USD.

China remains a place of unpredictable worry --- an opaque economy where worry flares up from time to time and spreads to global markets. The good news is that the PBOC and Beijing have plenty of ammunition to treat most types of trouble (a housing crash would be the exception). Today's CPI report is likely to underscore the space on interest rates as the consensus for the 0130 GMT report is a 1.6% y/y rise.

Another event to watch is the 0030 GMT RBA financial stability review. Lowe could offer hints on the framework for attacking inflationary risks like housing or market risks without adjusting interest rates.