Is the current dollar rally sustainable?

The dollar is trying to be resilient and showcased some strength following Friday’s better-than-expected employment report. Strength got extender after Trump signed executive orders partly restoring enhanced unemployment payments to the millions of Americans who lost jobs in the pandemic that would provide an extra $400 per week in unemployment benefits. This boosted the dollar as an immediate reaction to the update and it moved above its resistance zone of 93.50 levels. However, does that mean the current rally will be sustainable?

For a sustainable and long term rally, it is important for dollar to hold above 95.00 levels, which the index is struggling to move at present due to given reasons:

· Although coronavirus figures may be improving in August, the effects of that second wave are already causing more long-term job layoffs. Businesses that managed to pull through via various internal adjustments and government support are beginning to surrender.

· On the other side, sentiments are likely to be hurt as Trump escalated tensions with China by acting against TikTok and WeChat. Danger to the trade deal signed in January could further weigh on markets. Hence, the current broad dollar downtrend could continue and gains are likely to be short-lived as doubts prevail about the U.S. economic recovery.

That being said, will the same translate to euro, pound (GBP) and Rupee strength? Lets glance through the factors for each one:

EURO

: After three consecutive weeks with strong gains, euro-dollar remained almost unchanged despite the dollar getting stronger. For the Eurozone, the recovery post-COVID era has seemed to be faster in the race compared to the US. Eurozone manufacturing PMIs marked readings above the 50 level, which indicates expansion. German and the eurozone PMIs came in at 51.0 and 51.8, respectively. After a breakthrough in the Euro-zone stimulus package and in the absence of fresh triggers currently, there is no major reason for Euro to drive up except the improvement and pickup seen in the economy. Hence, with that, the pair might be looking for some correction that is overdue after a persistent rally and the recent dip can be seen rising out of profit-taking. Nevertheless, 1.1650 remains strong support for the pair and as long as the pair holds above it and dollar index remains below 95.00 levels, bulls for euro remain active. In euro-dollar terms, we suggest selling above 89.00 levels and it is advisable to not overbook as long as the pair sustains above 86.50 levels.

GBP: Looking at the sustenance of the pair above 1.30 levels it can be said that the sentiments towards GBP have improved of late amidst a broad-based recovery in global equity markets which tends to support the currency. Also, the Bank of England’s latest major policy update confirmed the Bank was in no rush to cut interest rates to 0 percent or below. The recent meeting implied that QE is its preferred policy for the current set of circumstances, so negative rates should remain the last tool unless things change substantially. That makes UK policy a little less distinctive, and this particular headwind for GBP looks less threatening for now. On the Brexit front, EU and UK negotiators have made progress on the majority of issues put forward in trade negotiations; however, there are a few problematic topics that have threatened to bring talks down altogether and thereby reflecting on the currency. However, despite a lack of progress so far, an agreement to more talks can be taken as a good sign for the currency. The only factor that might not be supporting the GBP for this month could be its seasonality effect where the pair has depreciated 9 times in 11 years.

Overall, until the time pair remains above 1.2750 levels, dips can be seen as a buying opportunity and bulls can continue to extend past 1.3150 levels. For pound-rupee, levels above 98.20-98.50 remain a good selling zone for the near term. However, overselling is again not advisable for GBP till the time the pair is above 96.50 levels.

Rupee: In the past report, we had mentioned the broader trend for the rupee in the medium-term and reasons why any uptick should be considered as a selling opportunity. Currently, there is nothing to playout for rupee thoroughly. With no news remaining good news and bad news getting warranted by inflows in the capital market, the rupee has all the reasons to portray its resilience. The actions in the pair are limited and no factor influencing it that strongly, rupee likely to remain neutral. Since the inflows have remained robust, the pair is relatively unaffected by global mishap. Till now, RBI has to be on the buying side and has accumulated around $ 12 billion in the last week of July taking the reserves to $534.5 billion. As long as RBI remains aggressively on the buying side, strength in the pair shall be limited to 74.50 levels. Once the RBI gets lenient, the rupee will get all the reasons to strengthen the past 74.50-mark. In the present scenario, it is wise to remain a seller on every opportunity above 75.20-75.50 levels.

-Amit Pabari is managing director of CR Forex Advisors. The views expressed are personal.