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USD Analysis and Talking Points

  • Merkel Exit increases Political Uncertainty in Eurozone
  • Month-End Rebalancing Suggests USD Buying
  • Federal Reserve QT to Spur Short Term USD Rise

See our Brand New Q4 FX forecast to learn what will drive major currencies throughout the quarter.

Merkel Exit increases Political Uncertainty in Eurozone

German politics took a turn for the worst for Chancellor Merkel as support for her coalition continued to dwindle with the Hesse state elections showing their share of votes dropping over 11 points, which followed a poor showing at the Bavarian elections. In response to this, German source reports have stated that Chancellor Merkel will not stand for re-election for the CDU head position in December. However, Merkel will look to stay as German Chancellor, potentially until a replacement is found. As a reminder, Chancellor Merkel is set to speak at 1200GMT who may or may not confirm these source reports.

Month-End Rebalancing Suggests USD Buying

As we approach the month-end, bank rebalancing models imply that there are strong buy signals for the USD against its major counterparts with Citi suggesting that the USD buy signal is the strongest since the financial crisis.

Federal Reserve QT to Spur Short Term USD Rise

Last year the Federal Reserve announce that they would slowly begin to shrink the Federal Reserve balance sheet from October, starting at a rate of $6bln/month and working up to a maximum of $50bln, in order to unload the $4.5tln of bonds acquired by the central bank through its QE program.The Fed has been rolling over its holdings of debt on expiry date, however it is now in the process of letting the debt roll of its balance sheet and redeeming the full amount paid for the bonds, creating a demand for Dollars in the process.

Short term Impact on the USD

Typically, on days with a large and negative impact USD liquidity, the Dollar has tended to gain while risk sentiment has been softer. October 31st will mark the next redemption day in which the shrinking Fed balance sheet will lead to the 2nd largest net negative impact on US liquidity by around ($22.9bln).

Dates

Par Value

Daily Impact on US Liquidity

Monthly Cap

USD Performance

Oct 31st 2017

$8.7bln

-$6bln

$6bln

0%

Nov 15th 2017

$11bln

-$3.5bln

$6bln

0%

Nov 30th 2017

$7.9bln

-$2.5bln

$6bln

-0.1%

Dec 31st 2017

$17.5bln

-$6bln

$6bln

0.1%

Jan 31st 2018

$27.6bln

-$12bln

$12bln

0%

Feb 15th 2018

$16.6bln

-$4.1bln

$12bln

-0.6%

Feb 28th 2018

$32bln

-$7.9bln

$12bln

0.3%

Mar 31st 2018

$31.2bln

-$12bln

$12bln

0.1%

Apr 30th 2018

$30.4bln

-$18bln

$18bln

0.3%

May 15th 2018

$26.2bln

-$8.6bln

$18bln

0.7%

May 31st 2018

$28.5bln

-$9.4bln

$18bln

-0.1%

Jun 30th 2018

$30.5bln

-$18bln

$18bln

0.4%

Jul 31st 2018

$28.5bln

-$24bln

$24bln

0.5%

Aug 15th 2018

$23.1bln

-$12.6bln

$24bln

0.0%

Aug 31st 2018

$20.9bln

-$11.4bln

$24bln

0.4%

Sep 30th 2018

$19bln

-$19bln

$24bln

0.4%

Oct 31st 2018

$22.9bln

-$22.9bln

$30bln

Nov 15th 2018

$34.3bln

-$17.4bln

$30bln

Nov 30th 2018

$24.9bln

-$12.9bln

$30bln

Dec 31st 2018

$18.2bln

-$18.2bln

$30bln

Source: Federal Reserve

Long USD on SOMA Days

Based on the past 5 SOMA redemption days, long USD has been a good proposition, given that these days have on average coincided with the Dollar index moving higher by 0.34% with a hit ratio above 70%. Consequently, this could see the USD firm against its major counterparts for much of the session.

US Dollar Price Chart: Daily Time Frame (June-October 2018)

USD Outperformance on Merkel Exit, Fed QT and Month-End Rebalancing

USD eyes last week’s high situated at 9638 before a potential retest of the YTD highs (9660). As the US Dollar remains in its upward trajectory, we could possibly retest this levels, while support at 9446 remains prominent.

USD TRADING RESOURCES:

--- Written by Justin McQueen, Market Analyst

To contact Justin, email him at Justin.mcqueen@ig.com

Follow Justin on Twitter @JMcQueenFX