Talking Points:
- The DXY Dollar Index has put in for a strong rebound after pressuring support on a two-and-a-half year old range
- There are plenty of themes to pick motivation from - risk trends rebound, ADP driving Fed, an update on tax reform intentions
- Liquidity remains one of the critical determinants for trend and motivation - from risk to Dollar to crosses
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Following the abrupt, intraday reversal it put in for Tuesday; the Dollar has followed up with meaningful progress this past session. For those always scanning the horizon for high profile and lucrative reversals, this is a second check for the Greenback for a list gauging conviction. Yet, we should gauge conviction according to the momentum that we are trying to reverse: an eight month bear trend that has weather rate speculation, risk trends and policy forecasts that proved otherwise beneficial to US-based assets but not the currency itself. In short, we should judge the Dollar's motivations for a true bull trend with a greater degree of skepticism. If there weren't deeper restraints in the form of fundamental momentum and tepid liquidity for fueling large reversals, the fundamental developments of the past session would certainly read as capable fodder for bulls.
On the political front, US President Trump held a press conference to present his loose proposal for the tax reforms that he has touted since the campaign trail. Simplification of the code, pressuring companies to repatriate profits from foreign accounts and reducing the corporate tax rate to 15 percent would certainly provide significant foundation for investors to project economic, revenue and profit growth. Yet, pushing through these items will be very difficult as the healthcare effort provided and the capital markets showed little enthusiasm - which makes a tail wind for the less responsive Dollar dubious. A modest advance from risk trends could be claimed as another fundamental tribute. A rise in global equities, further retrench of volatility readings and buoyancy from riskier assets was apparent. Yet, these markets' performance seemed to measure to marginal gains in ranges rather than commit to serious trend. While the Greenback is perhaps the most beleaguered of the modern risk assets - its yield advantage on this front has been heavily deflated. So then perhaps the Dollar is gaining due to a swell in Fed expectations that can carry trend? While the ADP payroll report is good lead-in to Friday NFPs, this has not been the absent ingredient to lift. Inflation is the missing puzzle piece and Fed Fund futures are still only showing a 31 percent chance of a hike by year end. Besides, the real pressure on the Dollar is the gains made by its major counterparts towards closing the monetary policy gap.
Perhaps a more substantial spark can be put to one of these major themes moving forward, but the wall is no easier to scale. The most prominent opportunity seems to rest with rate speculation with the Fed's favored inflation figure (PCE deflator) on tap Thursday followed by the market's favorite indicator overall - NFPs - on Friday. That said, the ECB rate decision next week will likely do more for the Dollar by way of EUR/USD than these two indicators combined. The true motivation for the FX market on the benchmark currency looks to be the same affliction to the entire financial system: liquidity. Structural complacency is a familiar sight, but it has been recently exacerbated by the height of the Summer Doldrums through the final week of August that precedes the US Labor Day holiday weekend in the US. With anticipation of heavier event risk ahead and a restriction of participation for the immediate future, it is more difficult to call deep reversals for the likes of EUR/USD and USD/CAD. But should the Dollar continue to gain traction, perhaps the NZD/USD and USD/JPY technical breaches and turns may yield more fruitful opportunities. These are similar conditions to evaluate risk assets (global equities, volatility products, etc); Euro crosses; a recently strong Pound; event charged commodity currencies and more on. We measure opportunity in technical appeal versus underlying conditions in today's Trading Video.
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