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Talking Points:

- The US Dollar is up across the board after the US Senate passed a budget clearing the way for passage of the Trump tax plan.

- US Treasury yields rise across the curve: 2-year yield back near yearly highs; 5-year yield at seven-month high.

- Retail trader sentiment suggests the near-term outlook for the US Dollar is neutral.

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The US Dollar is back on the upswing after a surprising positive twist in a key storyline along the fiscal front. Recall that coming into 2017, the US Dollar's rally was driven by speculation that singular party control of Congress and the White House would mean Republicans would be able to end legislative gridlock on Capitol Hill.

The net-product of healthcare reform, tax reform, and infrastructure spending (i.e. the fuel behind the "Trump reflationary trade") would be higher government deficits resulting in higher inflation levels, in turn pushing the Federal Reserve into a more hawkish policy stance. Yet as history will show, absolutely nothing has gotten done up to this point in 2017, with barely two-and-a-half months left on the calendar.

Accordingly, amid an otherwise absent economic calendar (save a speech by Fed Chair Janet Yellen, but it's after market close on Friday), news overnight that the US Senate had passed a version of a budget that would allow for US President Trump's tax plan to make its way into law has reinvigorated the 'tax reform' leg of the reflationary trade.

Chart 1: DXY Index Daily Timeframe (July to October 2017)

DXY Index Maintaining Uptrend from September and October Swing Lows

Bolstered by another push higher by US Treasury yields (the 2-year yield is back near its yearly high and highest level since 2008, and the 5-year yield touched a seven-month high), the DXY Index finds itself maintaining its rally - and bottoming effort - since the September 8 low (marked by the swing lows on September 8, September 20, and October 13).

Chart 2: Inverse USD/CHF, Inverse USD/JPY, Gold, & US Treasury 10-year Yield Hourly Timeframe (September to October 2017)

DXY Index Maintaining Uptrend from September and October Swing Lows

Concurrently, the move higher in US yields is offering fuel for the greenback against the low yielding, safe haven currencies whose central banks are maintaining zero or negative interest rate policies (ZIRP or NIRP). USD/CHF is testing breakout territory above 0.9770 again, while USD/JPY is back near its highest level of the month, formed on October 6, at 113.44.

Chart 3: USD/JPY Daily Timeframe (February to October 2017)

DXY Index Maintaining Uptrend from September and October Swing Lows

Elsewhere, traders will be paying attention to the calendar this morning not for US data but for Canadian data that will directly impact BOC rate hike expectations. Canadian inflation is expected to have remained below the central bank’s medium-term target of +2.0% in September, perhaps throwing a wrench in the market’s belief that another rate hike is coming before the year is done.

At the Bank of Canada’s recent policy meeting in September, and in subsequent comments made by BOC Governor Poloz, it was made clear that a third rate hike in 2017 was still in question. Amid the prospect of inflationary pressures staying below the BOC’s +2% medium-term goal, overnight index swaps for Canada are split with a 50% chance of a rate hike by year end. Despite recent improvements in the labor market, figures from Statistics Canada showed that overall wage growth is at its lowest since 1990.

Read more: US Dollar Taking Cues from Other Major Currencies

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

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