Forex_US_Dollar_Trading_Forecast_body_Picture_5.png, US Dollar Likely to Continue Higher, but Against Which Currencies?

US Dollar Likely to Continue Higher, but Against Which Currencies?

Fundamental Forecast for US Dollar: Bullish

  • Dollar Index (ticker: USDOLLAR) finishes near multi-month highs on Yen and Aussie Dollar tumbles
  • Volatility might slow in the week ahead, but keep an eye on key event risk in Japan
  • Have a strong opinion on the Dollar? Voice it through FXCM currency baskets

The Dow Jones FXCM Dollar Index (ticker: USDOLLAR) rallied for its third week of the past four and finished near multi-month highs. A holiday-shortened week suggests the Dollar price action may slow, but why might the Greenback see big moves in the days ahead?

A relatively empty US economic calendar could keep the Greenback range-bound, but sharp moves in the Japanese Yen could nonetheless force big swings in the dollar index. It was a surge in the USD/JPY exchange rate that boosted the USDOLLAR; a busy Japanese economic calendar could mean we see much of the same going forward.

To that end we look to results of Japan’s National CPI inflation and Jobless Rate reports for the month of October, while minutes from theBank of Japan’s most recent policy-setting meeting could likewise drive volatility. Given the Dollar’s surge to fresh multi-month highs versus the Yen, overall momentum and trader sentiment favors continued strength. Yet it’s worth noting that recent CFTC Commitment of Traders data showed large speculative futures traders are far and away their most short JPY futures (long USDJPY) on record. In our opinion the Yen will likely continue lower (USDJPY higher), but the trade looks very crowded.

US economic event risk will be limited to Housing data, a Conference Board Consumer Confidence report, and results from US Durable Goods Orders data. Market focus remains on the US Federal Reserve’s next moves as it regards the so-called “Taper” of Quantitative Easing policies. The Fed’s dual mandate keeps its focus on inflation and employment numbers, and it will take especially large surprises in the upcoming data prints to force important swings in yields and the US Dollar itself.

Can Yen weakness remain enough to drive the USDOLLAR to fresh highs? It’s entirely possible, but COT data warns that the USDJPY-long trade is very crowded. Elsewhere the Greenback remains mostly range-bound versus the Euro and British Pound, while weakness in commodity currencies has likewise boosted the USD’s position. Our Senior Technical Strategist favors selling into continued AUDUSD and NZDUSD declines.

Taken in sum, our Dollar outlook remains fairly bullish. Yet true fireworks may need to wait for highly-anticipated US labor market data due in the first week of December. – DR