US Dollar Hits Lowest Level Since 2015
The US Dollar index printed fresh lows again this week, falling to its lowest level since 2015. One of the major forces behind the dramatic sell-off is the scale of uncertainty linked to the Fed who will see nearly its entire staff replaced over the coming months. The Fed is expected to raise rates again at its December 13th meeting, though expectations have greatly receded in light of the recent slump in inflation. The Fed will clearly be monitoring inflation figures ahead of the December meeting looking for evidence to support their judgment that inflation weakness is temporary. However, recent Fed comments suggest that policymakers are themselves now losing conviction in the likelihood of this happening
The Fed will clearly be monitoring inflation figures ahead of the December meeting looking for evidence to support their judgment that inflation weakness is temporary. However, recent Fed comments suggest that policymakers are themselves now losing conviction in the likelihood of this happening. August CPI due on Thursday is expected to show inflation having ticked up over the month on the headline figure while core inflation is expected to have fallen back. A further weak print at this stage would all but finish USD off for the year.
Despite the sell-off in USD, recent data (outside of CPI) has continued to show positive momentum in the economy. Real GDP growth for Q2 was revised higher to 3% from the prior 2.6%, fuelled by stronger increases in consumption and business investment. Firmer personal finances and confidence indicators, supported by a healthier labour market and household balance sheets are continuing to underpin household spending.
Trump Administration Looking Weak
While discussions regarding tax reform have started to move more into focus, there is little to suggest that there will be any material economic impact from US fiscal policy adjustments over the next year as investors seem increasingly convinced that the Trump administration will struggle to deliver any fiscal stimulus.
Indeed, the recent pact between Trump and the Democrats, far from being taken as a sign of an increase in the President’s ability to take action, has been viewed as an act likely to further damage his already dwindling support within his own party. The sense of irritation among Republicans is clear at this stage and increases the likelihood that a growing number of party members will create difficulty for the President as he tries to push through policy.
Despite the broadly positive tone of US data, the general market consensus around the US economy remains fairly muted with many expecting a high cost to the hurricane damage suffered over the last week. Meanwhile, JPY has been seeing safe haven inflow due to the rising uncertainty regarding the nuclear threat from North Korea. Outside of geopolitical concerns, however, the recent strengthening in global fundamentals supports the prospect of a weaker JPY.
The economic outlook has especially improved in the eurozone and Canada with investors finally correcting their positioning in eurozone assets from the underweight levels of recent years. The key driver for USDJPY in the short term remains the situation with North Korea. Anytime there is a dialling back in rhetoric by both sides, or even a few quiet days, JPY starts to fade. However, safe haven demand kicks in immediately as soon as any provocative reports hit the wires and this dynamic is expected to remain in play for now.
After piercing the 2017 low USDJPY has reversed sharply and undoubtedly caught quite a few traders short in the process. For now, pressure remains to the downside, with price tracking the broad bearish channel running from November last year. The 110.91 area could be the zone where the recovery fades out as we have three previous swing highs at the level as well as the 50% retracement from the July high, so I will be watching for reversal signals in that zone. Above there, the next key resistance will be a test of the bearish trend line from last year’s highs.