DXY: Unwinding of consensus trade – OCBC

US Dollar (USD) saw a sharp drop after Trump announced no immediate tariffs on China. USD/CNH saw a sharp move below 7.26 overnight before rebounding. DXY was last at 108.50 levels, OCBC FX analysts Frances Cheung and Christopher Wong note.

Risks skewed to the downside

“Subsequent headlines came by quoting Trump imposing a 1 February deadline and tariff of as much as 25% on Mexico and Canada. Not surprisingly, MXN and CAD came under pressure. An absence of immediate tariffs but a 1 February deadline suggests that this is a strong call for Mexicans and Canadians to come back to the negotiating table quickly. Nevertheless, this underscores the fluidity of tariff developments. Tariff uncertainty remains in terms of timing, magnitude and scope of products.”

“And we continue to hold to the view that the implications on markets can be very much 2-way. On one hand, a longer delay on tariff announcement will continue to provide a breather for risk proxies while consensus trade (long USD) unwinds. On the other hand, a swift implementation of tariff would undermine sentiments and boost the USD. We do not expect a one-way trade in Trump regime.”

“Daily momentum is bearish while RSI fell. Risks skewed to the downside. Support at 108, 107.50 (50DMA). Resistance at 108.75 (21 DMA), 110.10 levels. With Trump inauguration done and dusted, next few days will be closely watched with regards to executive orders, executive actions he will sign.”