- The US dollar has initially fallen against the Czech koruna during the trading session on Tuesday, only to turn around and show signs of life.
- The 200-Day EMA offered support but was also in an area where we had previously seen resistance, so certain amount of “market memory” may have jumped into the market as well.
- This was based on the 23 koruna level, which obviously is a large, round, psychologically significant figure as well.
It is worth noting that we had pulled back initially from the 50% Fibonacci retracement level couple of days ago, so perhaps traders thought that we were going to continue to see the US dollar lose strength. That being said, it’s also worth noting that traders now believe that the Federal Reserve may cut one time between now and the end of the year, but that’s not even considered to be a “slam dunk” at the moment either. Quite frankly, even if they did cut between now and the end of the year, it doesn’t change much as far as the interest rate differential is concerned between the USD and the CZK.
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Interest Rate Differential, or Lack Of
The interest rate differential is roughly 75 basis points between the United States and the Czech Republic, and therefore it doesn’t really come into play for most traders in this pair. However, what does come into play is risk appetite, as it seems like the United States continues to contract inflows, especially if the Federal Reserve is not going to cut rates. You do get paid a very slight swap at the end of every day to hold this pair, and as traders start to come to grips with the idea that the Federal Reserve may not do anything between now and the end of the year, it has strengthened the greenback overall.
Furthermore, stocks in New York continue to perform very well, and I think that has a major influence on the US dollar against some of the smaller currencies as well. Also, the Czech Republic is probably going to see a little bit of a knock on effect from the war in Ukraine, although I don’t think that’s a major driver, other than proximity more than anything else. I remain bullish, but I also think this is going to be a choppy pair.
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