Dollar Bulls are BACK in Control

Dollar bulls are back in control thanks to strong US data and a recovery in yields.According to the latest GDP report, the US economy expanded at its fastest pace in nearly 4 years. While this report was simply a confirmation of numbers previously released, the fact that no revisions were made was enough to light the fire underneath USD/JPY. Durable goods also doubled expectations but the increase was largely due to Boeing orders. If the bears wanted to find reasons to drive the dollar lower they could have easily looked to the trade deficit which ballooned in August, higher jobless claims or pending home sales, which declined. However the greenback's disregard for these reports and the strong, broad based rally today is a sign of incredible strength. USD/JPY in particular erased all of Wednesday's losses to hit its highest level this year. The next major resistance level is right above 114. Wednesday's collapse and today's recovery were primarily fueled by the rise in Treasury yields. Had rates continued to fall, we would not have seen such a significant rise in USD/JPY.

The worst performing currency was the Swiss franc. After rising consistently for the past month, it experienced the strongest one day rise in 3 months. With no major developments from Switzerland, the rally was driven primarily by short covering. Although Germany reported stronger inflation, weaker confidence in the Eurozone and concerns about Italy drove the euro lower against the greenback. As reported by our colleague Boris Schlossberg, "Markets have been keeping a close eye on Italy's budget which is expected to come in at only 2% deficit, well within the EU limits. However, the newly elected populist government has been pushing for higher deficit targets as it seeks to stimulate the moribund Italian economy. If Mr. Tria resigns, triggering a budget crisis, the EURUSD could quickly tumble towards 1.1600 on renewed fears of a sovereign debt crisis." Yesterday we said the EUR/USD was prime for a breakout and likely to move down to 1.1670. Now that this target has been reached we could see consolidation above the 20 and 100-day SMA. German labor market data and Eurozone CPI are due for release tomorrow. According to the PMIs, the rate of job creation in Germany has eased but inflation should be strong based on today's CPI report.  

GBP/USD is trading back below the 100-day SMA. The market shrugged off positive comments from Bank of England member Haldane and EU Brexit chief Barnier. Haldane said at the current pace of growth more rate hikes are needed because the central bank can no longer afford to run the economy hot. Barnier said that after his meeting with British opposition leader Corbyn, he wants to help ensure an orderly Brexit withdrawal for the UK and hopes to build an ambitious future partnership together.   However none of this mattered on a day when all major currencies were driven by the market's voracious appetite for US dollars. Fourth quarter GDP revisions are scheduled for release tomorrowand like today's report from the US, no revisions are anticipated.

The commodity currencies also fell victim to US dollar strength with the New Zealand dollar leading the slide. The Reserve Bank left interest rates unchanged last night at 1.75%. While they see early signs of core inflation rising and expect growth to pick up in the coming year, they felt that downside risks remain and as such monetary policy needs to remain expansionary for a considerable period of time. Not much has changed in New Zealand and as a result, interest rate differentials, which have just moved in favor of USD, pushed the pair lower. We are looking for NZDUSD to break 66 cents. The Australian dollar also extended its slide on the back of weaker Chinese industrial profits and further losses are likely ahead of next week's RBA meeting.

Last but certainly not least, USD/CAD erased all of its earlier gains to end the day lower against the greenback. Rising oil prices and comments from Prime Minister Trudeau lent support to the currency. Trudeau said a trade deal with the US is still possible but it may be a long road ahead because President Trump doesn't share his optimism. According to Trump, who released a presser last night, he said Trudeau's "tariffs are too high, and he doesn't seem to want to move, and I've told him 'forget about it,'" It appears highly unlikely that Canada will be able to join the new NAFTA agreement and Trump administration is seeking to do a bilateral deal with Mexico alone. However the market appears to have already come to terms with the September 30th deadline being missed and are looking ahead of Bank of Canada Governor Poloz's comments this afternoon. The market still thinks the Bank of Canada will raise interest rates before the end of the year and if Poloz is hawkish we could see USD/CAD fall below 1.30 quickly.