US Dollar at the Mercy of External Monetary Policy Trends

Fundamental analysis, economic and market themes

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US Dollar at the Mercy of External Monetary Policy Trends

Fundamental Forecast for the US Dollar: Neutral

  • US Dollar continues to suffer even as Fed rate outlook seemingly improves
  • Selloff may reflect rush to participate as new tightening cycles get underway
  • BOC rate decision, UK CPI and Australian jobs data in the spotlight ahead

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The US Dollar is starting 2018 much as it did the previous year, with a long losing streak. The greenback has now fallen for five consecutive weeks against its major counterparts. Interestingly, this is happening even as Fed rate hike bets continue to swell.

Indeed, the priced-in tightening path implied in Fed Funds futures has steadily steepened since September. It now points to a cumulative 60 basis point gain in the next 12 months. That’s two rate hikes, and maybe a third. Investors put the probability that the first of these happens at the March FOMC meeting at 88.2 percent.

That puts the markets’ outlook and that of Fed policymakers broadly in line. Furthermore, central bank officials seemingly never miss an opportunity to stress that they favor slow and cautious stimulus withdrawal, hinting that a change in this status quo position is unlikely.

Against this backdrop, the greenback’s losses seem to reflect external factors, with capital flows chasing opportunities to get in early as other top central banks begin to dial back accommodation. The rush to capture would-be policy pivots from the BOJ and the ECB was clearly on display last week.

This means that the currency’s path next week will probably reflect developing yield prospects outside of the US. A slowdown in UK CPI may be helpful in that it keeps the BOE on the sidelines but a cheery tone from the BOC and a strong Australian jobs report that shifts up RBA rate hike bets may trigger selling.

Euro Turns to 2017’s Final CPI Figures After ECB Minutes Hint at Faster Exit

News events, market reactions, and macro trends.

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Euro Turns to 2017's Final CPI Figures After ECB Minutes Hint at Faster Exit

Fundamental Forecast for EUR/USD: Neutral

- The ongoing build up in net-long Euro positioning received a blessing from the ECB this week after the December meeting minutes hinted at a potentially faster than previously anticipated QE exit.

- If there’s anything that could derail the Euro right now it would be inflation data, of which we’ll get the final December (and thus, 2017) figures this week.

- The IG Client Sentiment Index has cooled on EUR/USD in the near-term.

The Euro was among the top performers last week, adding another +1.42% versus the US Dollar, with EUR/USD on its way to three-year highs. The big spark for the Euro rally came mid-week with the reveal of the European Central Bank’s December meeting minutes, whose underlying tone was more hawkish that anticipated. If a few things break right early on in 2018, the ECB has positioned itself as willing to withdraw stimulus faster than what is currently scheduled.

The subtle yet meaningful shift in the ECB’s tone would seem to hinge on economic data continue to point to accelerated rates of growth and higher inflation down the line. In general, economic data has been strong, with the Euro-Zone Citi Economic Surprise Index finishing Friday at +58.3, up from +46 the week prior. As noted last week, the decay over the past month appears to be a function of data rolling off the calendar and a lack of new releases at the end of December to replace them; now that data are being released again, the gauge is strengthening).

Likewise, recall that the final Euro-Zone Composite PMI reading for December showed that growth momentum in the Euro-area is at its strongest pace since January 2011, while the Euro-Zone Manufacturing PMI hit its all-time high to finish 2017.

In the coming week, attention will be on the final Euro-Zone CPI reading for December, in what amounts to the final inflation print of 2017 altogether. The final revision could very well be the wrinkle that gives traders pause in their determination to push the Euro higher, even if momentarily. Due in at +1.4% y/y from +1.5% y/y, and at +0.4% m/m from +0.1% m/m, the report doesn’t seem like it’s poised to be fuel for more upside.

But any pause the inflation data give mid-week should be temporary. Market measures of inflation continue to trend higher, and with the 5-year, 5-year inflation swap forwards, one of ECB President Draghi’s preferred gauges of inflation, closing last week at 1.739% - its highest level since February 21, 2017 – the ECB is probably feeling confident about its current trajectory of normalizing policy.

Traders will need to remain cautious about the overextended state of the futures market, where speculators are holding their largest net-long Euro position ever. For the week ended January 9, speculators held +144.7K net-long contracts, an increase from the previous all-time high set a week earlier at +127.9K. We maintain that as long as the Euro has strong fundamentals behind it, traders may continue to find excuses to look long the single currency as we approach the ides of January.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

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BoJ Discusses Reversal Rate as The Quest Continues Towards the Elusive 2%

Price action and Macro.

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BoJ Discusses Reversal Rate as The Quest Continues Towards the Elusive 2%

Fundamental Forecast for JPY: Bearish

Next week brings the final Bank of Japan rate decision for 2017. It’s been a rather quiet year for the BoJ, all factors considered; and quite the respite from the past few years when their very own policies were very much in the spotlight. Last year saw the stealth move to negative rates in January, catching many by surprise and leading to a troubling five-month period that saw USD/JPY drop all the way from above 121.50 to below 100.00. The oncoming ‘reflation trade’ that started around the U.S. Presidential Election in November pushed prices back towards that 120.00 level, falling just short as a double-top was set at 118.67 in December/January. After a pullback in the first quarter of the year, USD/JPY sank into a range that’s lasted ever since, now going on for seven full months.

USD/JPY Has Spent the Bulk of 2017 in a Range-Bound Fashion

BoJ Discusses Reversal Rate as The Quest Continues Towards the Elusive 2%

Chart prepared by James Stanley

The big item of pertinence circling around the Bank of Japan, and likely to be on full display next week is the bank’s outlook towards stimulus. The stimulus program that came into markets around the election of Prime Minister Shinzo Abe has continued to drive into Japanese markets going on five years now. And while inflation initially showed a promising response, eclipsing the BoJ’s 2% target temporarily in 2014; those hopes have fizzled in the years since as the Japanese economy has moved back towards the deflationary cycle that defined the economy for much of the past thirty years.

For the past year, inflation has remained between .2 and .7% in Japan, and this is with an outsized stimulus program in effect. After four consecutive months at .4% this summer, a quick visit to .7% in August and September led into a drop back-down to .2% in October. So, it would appear that we remain very, very far away from attaining the BoJ’s goal, with little hope in the immediate sights.

In September, we started to hear machinations around a potential increase in stimulus. This is when incoming BoJ member, Gouishi Kataoka, dissented at the BoJ’s rate decision. Dissent within the BoJ isn’t necessarily new, as we regularly heard prior board members Takahide Kuichi and Takehiro Sato dissent at meetings in the past. But their dissent was largely looking for an end to stimulus, or at least less of it; and the thought was that we’d seen more unanimity when their terms ended in July of this year. But, with Mr. Kataoka coming into the BoJ in July, the dissent continued, and this time in the opposite direction as the proposition was to see even more stimulus in the effort of driving the Japanese economy towards the 2% inflation target.

This theme saw a twist last month. BoJ Governor Haruhiko Kuroda mentioned the ‘reversal rate’ in a speech, and questions began to populate as to whether the head of the BoJ was dropping hints towards an eventual stimulus exit. Reversal rate is the rate at which rate cuts become detrimental for an economy, and given how loose policy has been for so long in Japan, this could be denoting a higher bar for future stimulus endeavors. This was initially interpreted as Gov. Kuroda noting that additional rate cuts may actually do damage to the Japanese economy, and this put market participants on high alert for a potential announcement moving the bank away from their gargantuan stimulus program in the coming months. But – in a clarification after the fact, we learned that ‘reversal rate’ entered the conversation at the prompting of Mr. Kataoka, in order to flag risks around additional easing; and now it seems as though this inclusion of the term ‘reversal rate’ is actually in order to lay the groundwork for even more stimulus in the future.

The BoJ appears committed here, and given the Japanese economy’s continued struggle to attain the elusive 2% inflation target, it would appear as though we’re nowhere near the conversation of stimulus exit.

The forecast for the Japanese Yen will be set to bearish through the end of 2017.

This note was originally published on December 15, 2017.

--- Written by James Stanley, Strategist for

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GBP: Upcoming Inflation Data May Dent Bullish Uptrend

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GBP: Upcoming Inflation Data May Dent Bullish Uptrend

Sterling/GBP Talking Points:

  • UK inflation data may derail the current Sterling rally in the short-term.
  • GBP rally continues against the weak US dollar but the EUR remains the strongest currency.

Fundamental Forecast for GBP: Bullish

We remain buyers of GBP going into the third week of January but caution that the current move may hit resistance if UK inflation remains above target. Headline UK inflation in November hit 3.1% - while core printed at 2.7% - above the Bank of England’s remit of around or close to 2%. December’s numbers are expected to tick down to 3.0% and 2.6% respectively, not enough for BoE governor Mark Carney to break open the champagne, but perhaps recognition that finally the recent strength of GBP has worked its way through the system and imported inflation has peaked. An unchanged figure would make any monetary tightening or guidance harder to justify, especially with UK growth still below par.

UK Economic Data Releases on Tuesday, January 16, 2018.

GBP: Upcoming Inflation Data May Dent Bullish Uptrend

I will be taking a more in-depth look at the upcoming UK data releases at 11:30 GMT on Monday, January 15, 2018.

The British Pound remains strong against an admittedly weak US dollar and has pushed back up above 1.3600 and back towards levels last seen on Brexit day in 2016. Sterling has taken the recent, messy, UK cabinet re-shuffle in its stride while Brexit talk is, for the moment, no longer such a political risk as it was seen to be last year.

The pair have been aided by fears that the US dollar may not get the Trump tax plan uplift that investors first thought and that with US inflation still below target, the expected three US interest rate hikes in 2018 may be pushed back along the calendar.

GBP/USD Price Chart Daily Timeframe (March 30, 2017 – January 12, 2018)

GBP: Upcoming Inflation Data May Dent Bullish Uptrend

--- Written by Nick Cawley, Analyst

To contact Nick, email him at

Follow Nick on Twitter @nickcawley1

Gold Prices Vulernerable as Rally Extends into Resistance

Short term trading and intraday technical levels

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Gold Prices Vulernerable as Rally Extends into Resistance

Fundamental Forecast for Gold: Neutral

Gold prices are attempting to close out a fifth consecutive week of gains with the precious metal up nearly 0.4% to trade at 1324 heading into the New York open on Friday. The advance comes alongside continued strength in U.S. equity markets and crude prices and although further gains are likely, the immediate advance in gold looks vulnerable heading into next week.

It’s another quiet week for data with the release of the Federal Reserve’s Beige Book and the University of Michigan confidence surveys highlighting the economic docket. Keep in mind it’s a shortened holiday week with U.S equity and bond markets close on Monday in observance of Martin Luther King Jr. Day.

The focus for gold is on the technical picture with the +7% advance off the December low now eyeing key technical resistance. Interestingly enough, a similar setup exists in oil prices and if the current interpretation is correct, we’ll be looking for a possible exhaustion trade early in the session.

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Gold Prices Vulernerable as Rally Extends into Resistance
  • A summary of IG Client Sentimentshows traders are net-long Gold - the ratio stands at +1.83 (64.7% of traders are long)- bearishreading
  • Long positions are 0.7% lower than yesterday and 2.9% lower from last week
  • Short positions are 1.4% higher than yesterday and 4.8% lower from last week
  • We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests Spot Gold prices may continue to fall. Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed Spot Gold trading bias.

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Gold Daily

Gold Prices Vulernerable as Rally Extends into Resistance

Gold prices broke above basic trendline resistance late-last month with the advance now targeting confluence resistance at 1329/30- this region is defined by the 76.4% retracement of the 2017 decline and the upper median-line parallel of the broader ascending pitchfork formation (blue) extending off the October low. Interim support rests at the 50-line which converges on the 61.8% retracement into the start of the week at 1311.

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Gold 240min

Gold Prices Vulernerable as Rally Extends into Resistance

Gold Prices Vulernerable as Rally Extends into Resistance

A closer look at near-term price action sees gold carving the monthly opening-range just below the aforementioned resistance zone with basic trendline support extending off the December lows highlighting near-term support just above 1300. A break below this threshold would risk a larger set-back in prices before resumption with such a scenario targeting 1295 backed by the 100-day moving average / median-line at 1289. That said, price is simply testing up-trend resistance.

Bottom line: The broader focus remains higher but from a trading standpoint, the immediate advance remains vulnerable while below structural resistance. IF the monthly opening range breaks lower, look for larger set-back to offer more favorable long entries, with a breach of the highs targeting subsequent resistance objectives at the 2017 & 2016 high-day closes at 1346 and 1355 respectively.

---Written by Michael Boutros, Currency Strategist with DailyFX

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USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Central bank policy, economic indicators, and market events.

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USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Fundamental Forecast for Canadian Dollar: Neutral

USD/CAD trades near the monthly-high (1.2902) as the Federal Open Market Committee (FOMC) appears to be on course to further normalize monetary policy in 2018, but a marked pickup in Canada’s Consumer Price Index (CPI) may rattle the near-term resilience in the exchange rate as it puts pressure on the Bank of Canada (BoC) to follow a similar path to its U.S. counterpart.

Fresh forecasts from Fed officials suggest the central bank will stay on its current course of delivering three rate-hikes per year, and the hiking-cycle may prop up USD/CAD over the near-term especially as the BoC endorses a wait-and-see approach for monetary policy.

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

With Fed Fund Futures showing budding expectations for a March rate-hike, the pair stands at risk for a more meaningful recovery going into the end of 2017, but key data prints coming out of Canada may spark a bearish reaction in the dollar-loonie exchange rate as the headline reading for inflation is expected to climb to an annualized 2.0% from 1.4% in October.

The threat for above-target inflation may heighten the appeal of the Canadian dollar its raises the risk of seeing Governor Stephen Poloz and Co. adopt a more hawkish tone in 2018, and the central bank may increase its efforts to prepare Canadian households and businesses for higher borrowing-costs as officials note ‘higher interest rates will likely be required over time.’ On the other hand, a below-forecast CPI print may fuel the near-term resilience in USD/CAD as it raises the BoC’s scope to retain the current policy for the foreseeable future. Interested in having a broader discussion on current market themes? Sign up and join DailyFX Currency Analyst David Song LIVE for an opportunity to discuss potential trade setups!

USD/CAD Daily Chart

USD/CAD Resilience Vulnerable to Strong Canada Inflation Figures

Near-term outlook for USD/CAD remains clouded with mixed signals as the pair marks a failed attempt to test the monthly-high (1.2902), with the pair stuck in a narrow range as the 1.2620 (50% retracement) region offers support. Keep in mind, the Relative Strength Index (RSI) highlights a similar dynamic as it struggles to push back into overbought territory, but the broader outlook remains supportive as the oscillator preserves the bullish formation carried over from August.

With that said, topside targets remain on the radar for USD/CAD, with a break of the near-term range raising the risk for a move back towards the 1.2980 (61.8% retracement) to 1.3030 (50% expansion) region. Want to learn more about popular trading indicators and tools such as the RSI? Download and review the FREE DailyFX Advanced Trading Guides!

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Aussie Dollar Could Yet Gain More If Domestic Data Play Ball

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Aussie Dollar Could Yet Gain More If Domestic Data Play Ball

Fundamental Australian Dollar Forecast: Bullish

  • The Australian Dollar market can look forward to two key data points this week
  • Domestic labour-market stats are coming up, as is news of inflation expectations
  • AUD/USD could rise further on both

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The Australian Dollar moved modestly higher last week, in the process extending the eye-catching bull run against its US rival which began back in early December. That run has now taken it to highs not seen since last October.

The Aussie’s support has been quite broad-based too. General US Dollar weakness has certainly helped. Global investors increasingly suspect that the US won’t be alone in tightening monetary policy this year and this suspicion has seen many currencies rise against the greenback. The Euro is notable in this regard, but the Australian Dollar has at least caught a tailwind. It has had some domestic help, too. News of blockbuster Australian retail sales raised hopes that the Australian consumer –often absent from the economic party- might be about to step up.

And the domestic front may continue to dominate Australian Dollar trade as we go through the coming week. There are two especially notable pieces of economic data due from Australia as it proceeds. The most important will probably be Thursday’s official employment figures for December. The previous month’s data saw a rise of more than 61,000 jobs. This not only crushed expectations –which had centered on a rise of just 19,000- it also formed the biggest monthly gain for more than two years.

Now this is a quite volatile series, especially in terms of the split between full- and part-time work, and it may be asking far too much to expect another storming month. However, Australia’s unemployment rate crept lower quite reliably thorough 2017. It started close to 6% and has nor retreated to 5.4%. Ongoing incremental improvement here will probably support the Aussie, even if headline job creation is likely to have a more immediate market impact.

The other piece of key data will shed light on consumer inflation expectations. These will be released just before the labour-market numbers, so Thursday could be a banner day for AUD/USD trade.

Consumer Price Index inflation has in fact been below the Reserve Bank of Australia’s 2% target for most of the time since late 2014, with the exception of the first quarter of 2017. Back then it rose just above the line. Subdued price pressures have been a key reason for perceptions that the RBA is reluctant to raise the Official Cash Rate from its 1.5% record low. Inflation expectations remained at 3.7% in December. A rise next week would probably be seen as supportive of the Aussie, although no-change could be too, given the price rises currently implied.

The week won’t all be about domestic numbers, however. Investors will get a look at China’s official growth data for the old year’s last quarter. Believe it or not that’s coming up on Thursday too! Beijing’s target for the year was 6.5% or better (a 6.5% print would be a new 27-year low). However, there has been some optimism expressed that growth might be a little stronger than that, and if it is the Aussie should benefit.

All up there could be some upside risk in the domestic data this week, especially for AUD/USD. So it’s a cautiously bullish call from me, albeit one mindful of the considerable gains already booked. One thing to watch, however, could be the fact that AUD/USD is edging up toward levels at which the RBA in the past has been minded to comment on it being too strong.

On past evidence it seems unlikely to remark again for as long as that strength stems from general US Dollar weakness. However, the possibility of verbal intervention remains one to watch.

Aussie Dollar Could Yet Gain More If Domestic Data Play Ball

--- Written by David Cottle, DailyFX Research

Contact and follow David on Twitter:@DavidCottleFX

The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Price action and Macro.

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The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Talking Points:

Fundamental Forecast for NZD: Bearish

The New Zealand Dollar spent much of this week clawing back losses that had very much dominated the currency’s price action over the past few weeks. Bigger picture, we can really draw back to July to focus in on when the pain really started to show for the Kiwi. This is when NZD/USD was trading over the psychological level of .7500, and this came on the heels of an aggressive rally that took two-and-a-half months to build-in over 700 pips on the pair. But in the three months since, the entirety of those gains have been eradicated. This bearish move in the New Zealand Dollar saw another fresh wave of selling on last month’s news around New Zealand elections, and after catching a bounce at the 2017 low last week, prices spent most of this week trudging-higher.

NZD/USD Daily: Corrective Gains for the Kiwi After Last Week’s Bounce at 2017 Low

The New Zealand Dollar and The Tides of Change Ahead of the RBNZ

Chart prepared by James Stanley

After newly-installed Prime Minister Jacinda Ardern’s Labour party crafted a coalition with the NZ First Parties, a blip of strength had temporarily showed-up in the Kiwi spot rate. This was very much driven by the prospect of an increase in the minimum wage; with the hope being that higher wages as brought upon by legislation could force stronger rates of inflation which, eventually, can put the Reserve Bank of New Zealand in a spot where they have to hike rates. But – that strength was short-lived, as Ms. Ardern is also promoting a modification to the Reserve Bank Act, and this can radically change the way that the RBNZ does business.

The proposed change would make the RBNZ also accountable for full-employment. This would be the incorporation of an additional mandate, on top of the RBNZ’s current focus of inflation. The change would effectively put the RBNZ in a spot where they have to try to balance the forces of inflation and employment, similar to the Federal Reserve utilizing a dual mandate versus the single mandate of Central Banks like the ECB. This is also happening while lawmakers consider an additional committee to manage the cash rate, and this invites a whole host of uncertainty around the future of the Kiwi-Dollar spot rate, along with that of the RBNZ itself.

On top of all of that potential change, next week sees Interim RBNZ Governor Grant Spencer conduct his first full monetary policy statement, and this also happens to be the first RBNZ rate decision under the new Labour-led government. There are no expectations for any moves on rates, and for the next expected adjustment, markets are currently looking out to Q4 of 2018 for a potential hike. The one possible area for change at next week’s rate decision is an adjustment to inflation expectations in order to account for the weaker currency. In Graeme Wheeler’s final press conference as the head of the bank in August, the RBNZ said that they anticipate rates staying on hold until at least September of 2019. Since then, we’ve seen inflation come-in at 1.9% versus the RBNZ’s projection of 1.6%, and the additional slide in NZD will likely necessitate a small adjustment for forward-looking inflation figures.

While stronger rates of inflation could eventually drive rates-higher, the prospect of change within the Reserve Bank Act will likely continue to dampen demand for NZD, at least in the near-term, as the rest of the world becomes more familiar with what a Jacinda Ardern-led New Zealand will end up looking like. The one thing that does appear certain is that Ms. Ardern is not satisfied with business as usual, and this can lead to further change. Markets, generally speaking, abhor change as this presents risk; and while the potential around those changes remain uncertain, we will likely see some element of risk aversion until market participants can gain more clarity. The forecast for next week will be set to bearish on the New Zealand Dollar.

--- Written by James Stanley, Strategist for

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