A Hint of What’s to Come

Commodity currencies remain the rise after Wednesday's upswing in risk trades but a reading on US business investment was cause for concern.GBP is the top performer in Thursday trade, regaining the $1.29 after as the UK and UK said they have reached an agreement on a free trade area. More GBP volatility remains ahead as PM Theresa May will return to London later on for a speech to Parliament at 14:30 GMT (GMT is now equal to London Time). The US is on holiday Thursday and that could lead to some choppy moves. Happy Thanksgiving to our US readers.

A small relief rally was the story ahead of the US holiday with equities and oil bouncing but the moves were very modest. In FX, the rebounds were more substantial with commodity currencies up more than 0.5% against the US dollar.

Fed doves accumulated a bit of ammunition with US durable goods orders down 4.4% compared to -2.6% expected. The prior was also revised lower. Capital goods orders non-defense ex-air, which is a proxy for business investment was flat and the October was also revised lower.

The promise of US corporate tax cuts and accelerated depreciation helped a pickup in investment, but core orders have been lower or flat for three months. They're up just 0.3% on average for the past 12 months compared to +0.7% in the previous 12 months. Looking ahead, the 30% drop in oil prices will undoubtedly curb business spending in the months ahead, and the trade war remains a headwind.

Consumers may have hinted at a small retrenchment with the final November U Mich consumer sentiment reading at 97.5 compared to 98.3 previously. We will be watching further November data closely.

In the week ahead, Powell, Williams and Clarida are all set to speak and that will be a golden opportunity to tee up a pause. The question then is: What will that do to the dollar?

It could be a quick fall with Treasury yields skidding below 3.0%. Most vulnerable may be something like USD/CAD where the yield differential could quickly erode but the BOC is also at risk of a dovish turn. USD/JPY and USD/CHF would benefit from the risk trade on a dovish Fed so the spot to turn may be AUD, which performed well Wednesday.