US Dollar Dives, What’s Next?

The one-way trade in the US dollar came to an abrupt end on Tuesday in a painful squeeze. The loonie was the top performer as oil prices jumped for the fourth day. Early in Asia-Pacific trading, the New Zealand jobs data was strong. Today's Premium GBPAUD was stopped out during an unusual surge in Aussie whispaws. A new round of Premium Trades are to be issued early Wednesday morning.

Short-squeezes are difficult to predict but US dollar longs have been a crowded trade for weeks and a sharp reversal finally hit. It wasn't just the dollar as oil shorts, gold longs and bond bulls were also squeezed.

The momentum started in EUR/USD as it broke a minor double-top at 1.1363 and subsequently broke a number of other levels until it finally stalled just ahead of the pre-ECB low of 1.1539. Cable and the Canadian dollar were also at the forefront of the move.

Crude was the driver for the loonie and prices rose as much as 24.5% from Thursday's low. In USD/CAD the pair touched the 61.8% retracement of the post-BOC move at 1.2350. Oil hit $54.27 but is already showing signs of staggering as API inventories rose another 6.1m barrels. That sparked some late selling back to $51.57.

Keep in mind that the BOC assumed price of WTI is $60, so anything lower keeps rate cuts on the table.

In AUD/USD was where the enormity of the USD squeeze was clearest, after falling nearly 200 pips to 0.7625 after the RBA, the pair climbed all the way back and more, hitting 0.7851 in rapid move. The kiwi rallied alongside it, especially after a strong milk auction.

Late in the day, NZ traders were also caught in a whipsaw on the jobs data. The first number to cross was a jump in the unemployment rate to 5.7% from 5.3% but it was entirely due to a rise in the participation rate to 69.7% from 69.1% and the underlying jobs data was very strong.

The market remains tentative on the kiwi with a speech from Wheeler due at 0000 GMT. It's virtually assured that he will attempt to jawbone NZD lower. Another event to watch at 0130 GMT when Japan releases Dec labor cash earnings. An improvement would keep the BOJ in the background