Fundamental Forecast for Dollar:Neutral
- Following a clear ambiguity over a December Fed hike, a range of central bankers are set to speak – including Janet Yellen
- October NFPs will represent top event risk, but payrolls and unemployment aren’t as important as the wage component
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The Dollar was once again offered the opportunity to make a run on 2015’s highs and move on to levels not seen since 2003. And once more it would fall short of the task. Thefundamental winds to the currency’s back are strong, but they are also well-encorporated. The relative fundamental appeal of the Greenback has carried EURUSD to 1.05, USDJPY to 126 and USDCNH to 6.60. An extension of this already-impressive run would require a serious escalation in conviction. But, what short of a realized Fed hike or financial plunge forcing investors to scramble for safety could measure up to the technical implications of a breakaway climb into 12-year highs? There is plenty on tap this week which will give it a go, but questions of scale will constantly plague bulls’ confidence.
Though this is a fundamental forecast, technical guidelines offer valuable contribution to the bigger picture. As with the S&P 500’s climb back towards the record highs set in May (currently around 2 percent away), the USDollar’s ambitions to overtake the 12-year high established in April represent a matter of conviction. Reaching such lofty levels is one thing. Breaking them and carrying forward is a different matter altogether. To extend the bull run, we have to ask whether there is enough untapped potential to further leverage the divergence in perceived value between the Dollar and its global counterparts. That can be a contrast dictated by the Dollar or its collective counterparts.
Looking out over the coming week – and admittedly beyond through year’s end – there remain two primary themes that we should inspect for market impact: relative monetary policy and risk trends. Seasonal studies suggest that the final two months of the year are prone to a drop in volume and climb in risk benchmarks like the S&P 500. What this boils down to is complacency leveraging the appeal of modest investment income – the raison d’etre of the past six year’s market bearings. Moral hazard is strong in the market, but the specter of a rebalance lingers. If risk aversion does kick in, the Dollar is ready to take advantage. In the meantime, we shouldn’t link the S&P 500’s dalliance with record highs to the traditional ‘bad currency’ view. Stable financial markets bolsters the probability of a Fed hike. Though, it should be said, that capital market performance is unlikely to motivate the hike; rather it will simply ‘allow’ it.
Short of a financial crisis that revives the long-dormant safe haven status of the Greenback, the most capable driver for the Dollar – for better or worse – is the speculation surrounding timing of the Fed rate hike. Last week, the FOMC statement defiantly kept the option for a rate hike in December. After the statement was digested, the market-based probability of a hike by year’s end rose from 34 to 47 percent. Skepticism is deeply engrained, so it will take considerable convincing to get the market to the same view of probability that the central bank sees which in turn rallies the Dollar.
Though dense, the docket ahead will still struggle to convert even with ideal outcomes. Friday’s NFPs will be top listing, but it is the wages component that will carry the real weight. It is the fount of genuine inflation, and it has struggled. If there is a sizable upgrade in this data, it might carry the necessary weight. Otherwise, data items like the PMIs and trade balance will bow to scheduled Fed speeches. A collective hawkish pitch would offer only a moderate foothold for bulls.
Perhaps a little more proactive in pushing the Dollar higher is the falter of the benchmark’s counterparts. The ECB and PBoC have vowed more easing while the RBA and RBNZ have warned more rate cuts may be appropriate. One of the top spring boards to this point, the BoJ seems a bit winded on QE. However, if all of these groups collectively shift global policy further into the bearish scale, the Greenback will look all the more remarkable for cautious hawkish backing.