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US Dollar Reversal Accelerates Pre-FOMC as December Highs are Broken

US Dollar Reversal Accelerates Pre-FOMC as December Highs are Broken

Christopher Vecchio, CFA, Senior Strategist

Talking Points:

- USDJPY sets new yearly high at ¥103.92.

- Aussie remains under pressure after yesterday’s RBA-driven selloff.

- Continued rise in US yields will underpin further Dollar strength.

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(vs USD)








Dow Jones FXCM Dollar Index (Ticker: USDOLLAR): +0.17% (+0.58% prior 5-days)


Weak hands may have been shaken out of their USD-long positioning the past few days, as a break in the USDOLLAR index coinciding with softer US Treasury yields allowed the EURUSD to climb back to $1.3800. However, in the wake of improving economic data out of the US, mainly, the “big three" - 3Q’13 GDP was upgraded, November NFPs beat, and November Advance Retail Sales beat - the buck's fortunes may be starting to turn ahead of next week's final FOMC meeting of 2013.

With a fiscal deal out of the way, Congressional intransigence is no longer a viable reason for the Federal Reserve not to taper QE3 – it having been a prime reason to maintain its $85B/month stimulus program in a shocking plot twist this September. Whereas market participants may have taken the data initially as a sign that, yes, the Federal Reserve will taper QE3, but no, there won’t be higher interest rates anytime soon, there is evidence of an evolution in this mindset.

In fact, after wiping out earlier this week, US Treasury yields, especially in the QE3 taper –sensitive ‘belly’ (3Y to 7Y notes) have rebounded, helping lift the USDOLLAR:

US_Dollar_Reversal_Accelerates_Pre-FOMC_as_December_Highs_are_Broken_body_Chart_1.png, US Dollar Reversal Accelerates Pre-FOMC as December Highs are Broken

The structure of the yield curve is shifting as well that would suggest market participants are bringing forward QE3 taper expectations. There are two spreads – the difference in yields between different securities – that are exhibiting such behavior.

The 5Y/30Y spread (5s30s), which dove to near 200-bps (2.000%) in September, shot higher back above 250-bps (2.500%) by the end of November. It has plummeted back to near 235-bps (2.350%) in the past two weeks, and a further decline here would suggest a more taper-friendly bias.

US_Dollar_Reversal_Accelerates_Pre-FOMC_as_December_Highs_are_Broken_body_Picture_1.png, US Dollar Reversal Accelerates Pre-FOMC as December Highs are Broken

The same can be said about the more widely observed 2Y/10Y spread (2s10s), which is mirroring behavior last seen during the height of QE3 taper expectations building into the September FOMC meeting. This spread recently broke its 2013 high, and is now at its widest differential since July 2011, before the US was stripped of its ‘AAA’ rating by Standard & Poor’s.

USDOLLAR Daily Chart: June 3 to Present

US_Dollar_Reversal_Accelerates_Pre-FOMC_as_December_Highs_are_Broken_body_x0000_i1029.png, US Dollar Reversal Accelerates Pre-FOMC as December Highs are Broken

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- The USDOLLAR regained lost support from the October 23 and November 20 lows, breaking to new December highs (invalidating the potential bearish outcome).

- A flag (10600 to 10670) with a false break lower may have developed, and the measured outcomes are 10760 (61.8%) and 10880 (100%).

- 100% extension coincides with August highs.

- Will look for daily RSI (21) to remain above 50 during uptrend; recent bounce at 50 coincided with base forming at moving average cluster (now TL support off of October 25 and December 10 lows, parallel drawn to November 12 high).


There are no data on the North American economic calendar for Friday, December 13, 2013.

See the DailyFX Economic Calendar for a full list, timetable, and consensus forecasts for upcoming economic indicators. Want the forecasts to appear right on your charts? Download the DailyFX News App.

--- Written by Christopher Vecchio, Currency Analyst

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