Dollar’s Next Move Falls to Speculators Rather Than Data
Fundamental Forecast for Dollar: Neutral
- Speculative positioning on the Dollar via futures has dropped to its most dovish position in 2-years
- Expectations for rate hikes have pushed back out to mid-2017, but risk trends may help supplement USD demand
- See our 2Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page
The Dollar started off this past week at an 11-month low and ended it with the best run since the early November climb that drove the Dow Jones FXCM Dollar Index (ticker = USDollar) to 12-year highs. It is an appropriate corollary to make as that previous run floundered soon after the high was set. New highs do not immediately translate to unchecked trend. Heading into this fresh week of trading, the currency doesn’t even have the benefit of the medium-term trend behind it. That is still tipped bearish. A long-term bull trend, medium-term bear and short-term bull. That is certainly a mixed picture for which a clear fundamental view for direction would be welcome. Unfortunately, there is no anchor for fundamental event risk this coming week for the Dollar. Either we are in for a struggle for headway or speculative positioning will have to step in.
Unlike the previous two weeks, the Dollar will progress without key event risk to focus speculators’ attention. This past week, the market was cued in on the April NFPs and the period before that was a combined reverence for the FOMC rate decision and 1Q GDP. Anticipation for major event risk has a tendency to motivate corrections in prevailing trends as speculators reduce exposure. Yet, it is the event risk itself that is expected to project a clear trend for the market to build on. That said, the high profile event risk behind us has done little but to deepen the dispute for fundamental bearing and leave rising volatility without an outlet.
From the most productive theme these past few years, monetary policy will be left to the natural winds of speculation. Speculation placing timing of the next Fed hike had peaked at December of 2016 before the recent round of data. Currently, those forecasts are pushed back out to mid-2017 before confidence is truly set. There is little reason for the dovish ranks to capitulate on their skepticism. The Fed’s official statement and numerous speeches from specific members have voiced frustration that market is significantly discounting the FOMC’s own outlook. If that persisted into an actual hike, the impact would be severe as it would catch the base majority by surprise. However, after consistent downgrades in projected pace for policy tightening, the market seems to need more than Fed ‘jawboning’.
We won’t be completely without rate speculation moving forward. For data, we have import and producer-level inflation readings and the University of Michigan’s consumer sentiment survey. The import price gauge is particularly useful as the US – like many country’s – is importing much of its deflationary pressures via natural resources. With the rebound in energy prices these past few months, we may start to see a break in the low inflation fever. From the sentiment survey, it is the components that are most useful. While economic outlook will dictate spending – a key GDP contribution – it is wages, inflation and employment which speak more to the rate conversation.
Outside of the errant winds of event risk, pure speculative considerations may be in play. Outside of the carry over to rate timing, we may find a stronger push to revive the Dollar’s haven appeal or even a practical repositioning drive. For risk trends, sentiment soured across the range of assets that depend on optimism to remain buoyant, jeopardizing a three month bull trend. While the critical break in sentiment that leads to full-scale deleveraging is likely some ways off, conditions are ripe for serious risk aversion. More practical, we have seen an exceptional swing in positioning behind the Dollar. Speculative futures traders have swung dramatically to a negative Dollar position according to the CFTC’s reports. This is a swell in exposure that outpaces both Fundamentals and the currency’s price. That may set the stage for a practical recovery.
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