Another Taxing Day for Dollar Bulls

Another Taxing Day for Dollar Bulls

Month-end flow distortions, Fed Chair announcement and the anticipation of House Republicans  to release a draft of legislation on tax reform tomorrow likely explains the dollars reluctance to move higher but hopefully, Thursday’s FOMC will have traders cranked up for some tangible offerings as the FX market’s focus has been wholly purposeless the past 24 hours or so.

But if you thought the tax reform debate would become less muddled, don’t get too excited as the Senate is planning on releasing its watered down version next week aimed at appeasing the Republican moderates and even some Democrats.

While the Fed Chair nomination( expected Thursday) and the specificities around the tax proposals will continue to dominate headlines, given the high performance in US economic data there is entirely no reason to expect anything but a reasonably hawkish tone from Yellen. More so with the recent US Q3 GDP coming in at 3.0% showing no dismissive impact from the Hurricanes, suggesting the US economy is roaring. With December rate hike running at 85 % probability a definitive signal from Yellen that the US’ economic performance is cause enough to warrant gradual rate hikes, we could see a more aggressive reprice for the 2018 Fed campaign. There are 22 bps of hikes priced into Dec FOMC with around a further two rate hikes priced for 2018.

.Keep in mind, these are gloomy forecast and if inflation were to strike like a thunderbolt out of nowhere, the market would have to do some giddy-up to pricing in a much more aggressive Fed tack. Speaking of which and looking through the Fed Chair nomination which is debatably fully priced in, the markets will be very focused on Friday’s AHE more so after the dramatic September reading. The market was a bit dismissive of that print due to hurricane distortions, but if this month reading indicates any hint of wage pressure the dollar will rocket higher.

The New Zealand Dollar

It’s been a tough slog for the Kiwi bulls of late, but the resounding beat on this morning’s jobs data with massive 2.2% rise in employment in Q3, easily outpacing the consensus forecast of 0.8% a  significant short squeeze has unfolded And while this outsized print will  unlikely have any significant  bearing on the RBNZ policy given the increased political surveying and involvement in the system, it will none the less underpin sentiment until the FOMC release.

The British Pound

The BoE is expected to raise rates, but the fate of the pound remains on guidance. If the market perceived a one and done, which is the most likely scenario, the Pound is at risk of a sharp retracement. However, if the statement signals the early stages of a rate hike cycle, traders will be tripping over one another to buy topside exposure on the Pound. But like so many other central banks the BoE is also dealing with tepid wage growth, despite some exchange drove inflationary pressure,  the market leaning towards the one and done camp.

The Australian Dollar

The most active persuasion trade continues to be the short AUD as its one of those wake-ups and smells the coffee type scenarios.The evolving data divergence between the US and Australia is too poignant to ignore, and the market should remain in sell the rally mode looking for a significant break lower on a more aggressive Fed narrative. Even a moderately hawkish fed should do the trick

The Japanese Yen

The firm Chicago PMI date overnight Up 66.2 versus just 60.0 expected and 65.2 prior has put, but a small bounce in the USDJPY bulls step. But to be honest, the follow through has been rather insipid given the plethora of data and position risk yet to unfold this week

EM Asia

The sharp drop in US yields on the back of the Mueller investigation and the less hawk appeal for odds on Fed Chair favourite, Jerome Powell. USDAsia has had a good run on the headline. And with Boj remaining faithful to their overtly dovish forward guidance, regional sentiment has remained buoyant.

Also, the KRW bulls are toasting South Korea improving bilateral relations with China which portends exceptionally bullish for regional sentiment on the de-escalation of geopolitical risk.

With the majority of central banks within the Group of 10 turning dovish, the ECB surprising so, this may  reel in EM Asia investment flows which should offset regional risks to higher US interest rates and a slightly stronger dollar.
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This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes