Dollar Eases Into Reversal Threat, USDMXN and USDCAD Alternative Scenarios
Dollar Talking Points:
- A run of high-level event risk this past 24 hours will be followed by another wave in the next 24
- Topping fundamental and trade interest were an expected Fed cut and modest US 3Q GDP beat
- Risk trends at the Thursday New York open will be telling as to what markets are willing to run with after FAANG earning and a SPX record
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The Dollar Is Moving Towards Trend Support after a Fed Cut and GDP Beat
While there was a lot of critical event risk this past session, it seemed the milestones for the US would draw an inordinate amount of attention and market response. That should come as no surprise given the size of the economy represented and its influence over the global speculative mood. From the docket, there were particular updates that would naturally draw the interest of US Dollar traders: the country's third quarter GDP and the Federal Reserve's monetary policy decision. As I've argued before, the state of this and other major economies' health is arguably the most potent of the major fundamental themes as the course of speculative appetite is so drastically disparate relative to the underlying value this foundation would imply. Yet, for this reading, there was enough favorable 'surprise' to bolster cater to risk bulls. The 1.9 percent annualized pace of expansion was slower than the previous quarter and carries some unfavorable component figures, but it managed to beat the 1.6 percent forecast - and speculators haven proven themselves more than willing to respond to improvements that may not shift systemic views.
A GDP beat alone would be an argument for a Greenback rally, but that was not the only update on tap and arguably not the most provocative either. The Federal Reserve rate decision held that honor. As it happened, the US central bank met expectations fully baked into the markets. While Fed cut rates for a third consecutive meeting, futures markets priced in a 99 percent probability that this was exactly the outcome we would witness. In other words, this outcome was fully priced in. The real interest was in what signals the policy authority would offer for intent of subsequent easing. The statement made no effort to keep the door wide open for subsequent cuts and Chairman Powell attempted to state that the bar was high for subsequent easing. However, the market has heard this before. In fact, in the lead up to each of the previous three meetings (all ending with cuts), the consensus for the group that no easing measures would be pursued. Each time, the central bank deviated from its guidance. This skepticism may be contributing the Dollar's slide, but that is not a particularly active course to pursue.
Chart of DXY Dollar Index with 200-Day Moving Average (Daily)
Chart Provided by TradingView
A mere skepticism that the Fed will ease again is not enough to forge a bearish break for the DXY Index. Reversing a more-than year-long bull trend would require some fundamental conviction to earn the break and certainly to fuel the bearish follow through thereafter. There is some moderate opportunity for this on the docket. The Fed's favorite inflation figure, the PCE deflator, is due Thursday. A significant easing could perhaps leverage dovish forecasts and maybe even add to speculation of a December cut, but I remain skeptical. The NFPs on Friday are better for short-term impact but will struggle to alter the course of monetary policy. In the meantime, I am holding open alternative options for a Dollar rebound. I'm particularly fond of USDMXN and USDCAD which have sound technical backing and some fundamental leverage to work with.
Chart of USDMXN with Daily ‘Wicks’ (Daily)
Chart Provided by TradingView
Sentiment Bias Shifts to Test Enthusiasm Rather than Skepticism After FAANG Earnings
As we move into the new trading session sorting out the competing fundamental themes for the clear signal of the underlying market, I will be watching the most systemic course of the financial system: speculative appetite itself. After Wednesday's run came complete with marginal Fed support, there was a fairly broad signal of risk appetite to follow. It wasn't a momentous drive but it was broad: a strong signal for underlying sentiment. With S&P 500 pushing record highs, we would assume it would be easy to nudge markets further to edge out a break of a long-term rising wedge to complement to the advance to its peak. Adding to that perspective, the after-hours earnings beat from Apple and Facebook should extend the favorable winds. If FAANG, Nasdaq and the S&P 500 fail to leverage this backdrop, it could raise serious concerns over intent.
Chart of S&P 500, FAANG Index and Nasdaq-to-SPX Ratio (Daily)
Chart Provided by TradingView
US Isn't the Only Country Offering Growth Updates for the Globe
From global growth forecasts, there are local fundamental matters with focused volatility potential; and then there is the systemic implications of a world sinking into a potential recession under converging pressures like the end of a normal cycle and manufactured influences like trade wars. The Mexican 3Q figure tipped the North American country into a technical recession. The Canadian monthly figure is due in the upcoming session, which should round out the regional picture and perhaps inform the USMCA negotiation status. France, the Eurozone's second largest member, offered up a 0.3 percent beat with its own quarter report; but that didn't seem to inspire the Euro. Perhaps the EZ's own figure ahead is expected to carry greater weight and has shifted attention forward. In Asia, Hong Kong has already warned it has tipped into recession while the Chinese PMIs set the stage for further slide for the important manufacturing sector. Overall, the global outlook looks strained and we should not underestimate the impact that the epiphany of economic struggle can have on a risk-skewed market.
Big Picture Monetary Policy Questions Versus Measured Relative Performance
While there is capacity for trade wars and Brexit to stir the volatility pot over the coming session; for broad influence, my expectations will focus on monetary policy as a potential driving force. In addition to the Brazilian central bank this past session (which cut rates 50bps), another key economy just outside the core for the upcoming session is the Hong Kong Monetary Authority. A 25bp hike may seem unexpected, but the forecast is rooted in an effort to maintain stability in the USDHKD peg and keep capital in place against a backdrop of social unrest. The Bank of Japan (BOJ) is the more remarkable player in my estimate. They are unlikely to change their policy mix but that is largely because they are already pushing the bounds of accommodation with increasing recognition (among officials and the market) that policy is losing its influence. There is little worse for a major monetary policy authority than the loss of influence over sentiment - be it business, consumer and investment. If global monetary policy loses its luster, there is an enormous value gap that must be reconciled.
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