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#1 29-01-2018 08:59:50

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USD: Explaining US dollar weakness and its potential recovery

USD: Explaining US dollar weakness and its potential recovery

Article by Pepperstone:

January is shaping up to be the worst month for the U.S dollar since Jan 2017. The Dollar Index declined week after week and this latest leg drove the greenback to its lowest level in 3 years.

With a relatively light U.S. economic calendar this past week, very few investors expected big moves. Yet the greenback sold off against all of the major currencies, losing 3% of its value against the Swiss Franc, 2% against sterling and 1.8% against the Japanese yen. This decline took EUR/USD to 3 year high and AUD/USD to a 2.5 year high. Further gains were also seen in other major currencies but the milestones were less significant. Official rhetoric and central banks rocked the markets, leading to unusually wild swings in FX. As tempting as it may be to pick a bottom in the dollar or fade the rally in stronger currencies, trends in the forex market can last longer and extend further than most would anticipate so its premature to assume that the end of week rebound off the lows marks a bottom for the greenback and a top for other currencies.

Data Review:
Arrow House Price Index 0.4% vs. 0.5% Expected
Arrow Manufacturing PMI 55.5 vs. 55 Expected
Arrow Services PMI 53.3 vs. 54.3 Expected
Arrow Composite PMI 53.8 vs. 54.1 Prior
Arrow Existing Home Sales -3.6% vs. -1.9% Expected
Arrow New Home Sales -9.3% vs. -7.9% Expected
Arrow Advance Goods Trade Balance $-71.6b vs. $-68.9b Expected
Arrow GDP Annualized 2.6% vs. 3.0% Expected
Arrow Personal Consumption 3.8% vs. 3.7% Expected
Arrow Core PCE 1.9% vs. 1.9% Expected
Arrow Durable Goods Orders 2.9% vs. 0.9% Expected
Arrow Durables Ex. Transportation 0.6% vs. 0.6% Expected

Data Preview:
Arrow Personal Income, Personal Spending and PCE Deflator- Higher wages will be offset by weaker retail sales
Arrow Consumer Confidence- Potential for downside surprise given sharp decline in University of Michigan Index
Arrow Employment Change- ADP is important leading indicator for NFP but hard to predict
Arrow Chicago PMI and Pending Home Sales- Potential for downside surprise given weaker Empire State and Philly Fed
Arrow FOMC Rate Decision- Yellen's last FOMC meeting not expected to be big mover
Arrow ISM Manufacturing- Will update after Chicago PMI but Empire and Philly Fed were both weaker pointing to softer release
Arrow Non-Farm Payrolls- NFP is incredibly market moving but hard to predict and best traded reactively
Arrow Trump First State of the Union Address

Key Levels:
Arrow Support 108.00
Arrow Resistance 110.00

There are no shortages of factors driving the U.S. dollar lower. On a broad basis, stronger global growth makes U.S. assets less attractive especially during a time when investors are worried about trade wars and the country’s fiscal finances. In the latest week, however, it was the Bank of Japan’s inflation language tweak, stronger data abroad, the U.S.’ solar import tariff, Treasury Secretary’s comment about the benefits of a weaker dollar and softer U.S. data that sent the greenback tumbling lower. At the end of the week, President Trump tried to walk back those comments by saying they were taken out of context and the U.S. supports a strong dollar policy and Bank of Japan Governor Kuroda did the same when he said in Davos that they did not revise inflation outlook. Confusion about policy only compounded the volatility. Add to that the weakness of jobless claims, housing data, trade balance and Q4 GDP and its no surprise that investors are reluctant to trust the dollar’s recovery.

Technically, the dollar is due for a bounce but on a fundamental basis, there needs to be a catalyst. It could range from anything like comprehensive central bank jawboning to intervention talk, other comments from government officials, data or a sudden correction in U.S. stocks. All of this is plausible given the aggressive moves in currencies and equities but its also speculation because until it happens, bears will remain in control. Looking ahead, there’s certainly no shortage of catalysts for a dollar reversal. The Federal Reserve will hold its first monetary policy meeting of the year, non-farm payrolls are scheduled for release and President Trump will deliver his first State of the Union Address. We don’t expect much volatility off of this month’s FOMC meeting because the most important part of this meeting is that it will be Janet Yellen’s last. With no press conference, she’ll go out quietly leaving most of the FOMC statement unchanged. Since the last policy meeting, there’s been slightly more deterioration than improvement in the U.S. economy so there’s very little reason for Yellen to change the Fed’s tune right before she passes the baton over to Powell. With that in mind, there have been significant changes to market dynamics with the dollar falling which is inflationary, 10-year yields rising 25bp and the S&P shooting up 7% to fresh record highs. Its hard to predict whether Trump’s State of the Union will be market moving – he will certainly tout the gains in stocks and the performance of the economy, but he could also inflame trade tensions and set back U.S. funding talks. Non-farm payrolls are the wildcard. Job growth slowed significantly last month but wage growth was strong – economists are looking for payroll growth to accelerate and wages to hold steady but that’s unlikely to be the case. However if the dollar truly turns and other currencies succumb to profit taking, the corrections could be sharp and aggressive.

"Anything worth having is worth going for - all the way." - J.R. Ewing



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