Fundamental Forecast for Dollar:Neutral
- The headline CPI reading has held below 0.2 percent throughout 2015 acting as a key hurdle to Fed hikes
- With the Yuan closer to market determination and Greece pressures eased, reserve competition rises
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The ‘Summer Lull’ doesn’t do the US Dollar any favors. As a favored haven currency, the reduced volatility - and thereby risk - curbs its innate demand. Further, as market depth grows more shallow, there is less inclination for speculative appetite to build upon itself. That is problematic for feeding Fed rate forecasts given how deeply skeptical the market has remained even through the active and data-heavy periods. What’s more, the trouble that has plagued a number of the Greenback’s primary counterparts has also subsided which dampens its reserve-specific quality. Under these conditions, it will be difficult to mount a serious rally for the Dollar. In the absence of surprise fundamentals and volatility, a moderated pace and propensity for congestion will prevail.
If we are looking for the most capable catalyst for Dollar activity, it would speculative-based volatility – in other word’s ‘risk trends’. Capable of self-promoting momentum and spanning all asset types, the balance between fear and greed overrides all. That said, stoking a genuine conviction-derived move in these summer trading conditons without an obvious fundamental lightning rod to draw attention is exceptionally difficult. It isn’t impossible, but it will require a far more dramatic shove. Instead, as we pass further days and weeks without a meaningful market swing, the haven premium to the dollar will slowly bleed off and weigh the currency further.
Looking to the economic docket for guidance, the greatest potential for Dollar movement in the week ahead will rest with a familiar theme: monetary policy speculation. In the crowd of data scheduled for release, there are two particular events that stand out for their influence over rate forecasting. The CPI figures are not the Fed’s preferred inflation measure, but the various indicators (CPI, PCE, prices components from PMIs) show a strong correlation. Considering the FOMC has maintained their intention to tighten policy sooner rather than later, a move towards recovering price pressures could go a long way for the central bank and speculation.
For the FOMC minutes (the transcript from the previous meeting) ther is approximately the same potential for market influence as the July 29 decision itself. The market didn’t expect a move at the last gathering; so they were instead looking for cues for whether September 17 was the liftoff date or not. The initial statement didn’t dispute the notion which they have so carefully insinuated, but the minutes will give greater insight and thereby a more reliable probability.
Aside from data and the long weight for a return to active sentiment fluctuations, there is another motivator that Dollar traders should keep tabs on as it is unusual active: reserve interest. The US currency accounts for 64 percent of total world reserves, and that appeal produces a passive bid. Yet, that position is not rigid and nor is the USD. This past week we have seen the PBoC move to further open its exchange rate mechanism and Greece receive its bailout program. That will reinforce the Yuan and Euro – key Dollar counterparts. – JK