Buy the Dip in USD Viable as FOMC Minutes Provoke Profit Taking
- Weekly claims data shows US labor market chugging along.
- See the November forex seasonality report that forecasts US Dollar strength.
The release of the FOMC minutes yesterday provided few surprises to market participants: indeed, policymakers have become more optimistic on the US economy, as a rate hike in December now looks nearly certain.*
Ah, the asterisk*, of course denoting a contingency; in the FOMC's case, this asterisk is that US economic data continues to improve along its current path. Well, since the October 27-28 meeting, which these particular minutes covered, we've already seen two important reports. Both the October NFP report and October CPI report came in above expectations (in particular, non-rent service inflation is starting to move higher, suggesting that inflation is moving beyond rents and could start to pressure wage growth). If the Fed was looking for signs of improved data, it has those conditions; just need to get through the November NFP report now.
Putting this in context of positioning in the market - the retail trading crowd is now net-long EUR/USD, and net-long US Dollar positioning in the market (proxied by DXY, per the CFTC's COT report) is only 43.8K contracts, nearly half of the 81.3K net-longs seen early this year - this retracement in the USDOLLAR Index and her constituents appears to be of the profit taking variety, not the early stages of a major reversal.
--- Written by Christopher Vecchio, Currency Strategist
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