Sometimes it’s Best to Bet on Second Place

The US dollar rally started on about July 10 and since then has gained at least 2.3% against every major currency except one – the Australian dollar. AUD/USD is still down 1.1% in that period but the relative resilience of the Aussie says something about underlying demand.  As the NZ dollar extends losses across the board and breaks below a key trend line, our AUDNZD long pusjes further into the green. There are currently 10 Premium trades in progress, 6 of which in profit, 1 flat and 3 are in a loss. All details are in the Premium Insights.

The reason that betting on the second best performer in a trend is that the hot money tends to flood into the leader. In this case it's the US dollar and on some metrics that move is beginning to look overdone. When the inevitable correction comes, second best is the safe place to be.

On Wednesday, the US dollar continued to outperform following the FOMC minutes. The knee jerk came on headlines that said “many” Fed officials said job gains could bring a sooner rate rise. The market generally moves on the headlines and looks deeper later. The actual text was more nuanced saying that “if” progress toward objectives was quick “it might” be appropriate to hike sooner.

In any case, the market voted for the US dollar, sending USD/JPY to 103.85 (near the April high) while the euro and cable continued to trace out cycle lows.

We argued for US dollar strength early in the week but the market will now laser in on Yellen's speech and the dollar bulls sitting on profits are likely to head to the exits.

AUD/USD is one spot a retracement could materialize but in the short-term the risks come with the HSBC China PMI at 0145 GMT.

Barring a surprise from the 51.5 consensus there's a base in the Australian dollar that could last. Stevens' comments yesterday basically ruled out a rate cut and removed the threat of intervention. If risk assets continue to rise the carry trade could also give the Aussie a lift.