SD Underpinned by Month-End Signals, However, Fed’s Powell Poses Risk
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USD Analysis and Talking Points
- Month-End Rebalancing to Underpin USD
- Federal Reserve Balance Sheet Unwind to Spur USD Bid
- Fed’s Powell Poses Near-Term Risk
See our Brand New Q4 FX forecast to learn what will drive major currencies throughout the quarter.
Month-End Rebalancing to Underpin USD
As we approach the month-end, eyes will be on the typical rebalancing that takes place. As it stands, investment bank rebalancing models from Citi and Barclays suggest that signals are for USD buying against its major counterparts with the strongest USD buy signal against JPY. Consequently, month-end demand may underpin the US Dollar over the next few sessions.
Federal Reserve Balance Sheet Unwind to Spur USD Bid
Friday will mark the next redemption day in which the shrinking of the Federal Reserve balance sheet will lead to a net impact on US liquidity of -$12.9bln. Typically, a large negative impact on USD liquidity will see the US Dollar gain against its major counterparts, while risk sentiment dips. 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 0.2% with a hit ratio above 70%.
Fed’s Powell Poses Near-Term Risk
Arguably the most important factor for the US Dollar today will be comments from Fed Chair Powell. Recently the Chair had dented the Dollar having provided a rather cautious outlook, whereby he stated that while the US economy is strong, the US could face headwinds going into next year regarding slowing demand and fading fiscal stimulus. Given that not an awful lot has changed since these comments, it is unlikely that the Chair will deviate too much away from this view. However, much like Vice Chair Clarida did yesterday, the Fed Chair will likely persist on highlighting that gradual rate hikes will continue (despite President Trump’s displeasure with higher interest rates) and that the Fed will be “data dependent”.
US Dollar Price Chart: Daily Time Frame (Nov 2016 -Nov 2018)
The USD remains in the rising channel, signalling further upside. Consequently, the USD is looking to make a test of the November 12th high (97.16). A break above opens up room for a move towards 97.75, which marks the 61.8% Fibonacci retracement of the 2017 high to 2018 low.
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--- Written by Justin McQueen, Market Analyst
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