USD may not extend its downtrend since early 2017. Sell EUR/USD?
Fed could act more hawkish as what investors are expecting now
In our “Weekly Market Report” last week, we mentioned “Why Dollar Bull Is Likely to Run Out of Stream” even as Trump proposed the tax reform plan in detail. Dollar’s trading pattern was in a range last week. We do not see a substantial dollar rebound in the final quarter of the year. However, in this report, we will explain why you should not sell US dollar consistently, even after poor payroll numbers reported last Friday.
Dollar index had been falling in the last three consecutive quarters. Wall Street has a good saying: “Trend is your best friend”. We think applying this rule on dollar in this quarter carries tremendous risk, and here are five reasons why.
Reason #1: Don’t focus too much on NFP, watch the unemployment rate as well
Nonfarm payroll employment decreased 33,000 in September, the first contraction in seven years. Data showed sharp employment decline in food & beverages services and below-trend growth in some other industries. This reflected the impact of Hurricanes Irma and Harvey. Such outcome showed weak NFP don’t reflect the economic fundamentals and Fed has no reason to set policy outlook based on the payroll numbers this month.
The unemployment rate in September declined to 4.2%, lowest level since 2001. It is worth taking a look. With the unemployment rate heading towards 4% and probably falling below, Fed must respond to “very tight” US labour market by gradually raising interest rates or risk halting the economic recovery. Prudent risk management would argue for continued gradual removal of monetary policy accommodation, in order to minimise the risk of shortening the current economic recovery prematurely.
Thus, market will start to gauge and price in the number of Fed hikes in 2018 in the coming months. This is likely to be dollar positive.
Reason #2: Weak dollar has benefitted the labour condition in US manufacturing sectors, better corporate profits mean a better US economy
Ignoring the latest payroll report, US manufacturing payroll had been improving in the past 12 months, thanks to the weak dollar. Soft dollar lifted the manufacturing companies’ profit, suggested a more solid US economy. Improving profitability in US companies echoed the current uptrend in its stock market, which should be positive to US dollar.
Reason #3: Fed could be more hawkish than you are expecting, Yellen’s behaviour could be a “good message”
Yellen’s term as Fed president could end by next February. In recent weeks, Yellen kept emphasising the importance of containing financial risks, suggesting the rate hikes will continue despite the below-target inflation data. As we know, rising interest rates would obstruct Trump’s economic plan in two crucial ways: higher interest to pay and collapse of the stock market.
Do not let this mislead you. This is about economics, not politics. Our best guess is Trump’s economic reform agenda may gradually kick off in 2018, including the recent proposal of tax reform. If so, Fed will do its best to contain the financial risk, otherwise bubbles will be created in the various US financial sectors.
Reason #4: “ECB play” positions are exhausting
Let’s face one reality; USD weakness in earlier months was mainly driven by euro strength. Now there are less investors believing ECB is in a rush to tighten their monetary policy. Many of the traders started to close earlier “long euro” positions. After EUR/USD broke above 1.20 last month, the pair fell back quickly below 1.20. Such price reaction suggested there were not much interest in the market to purchase EUR/USD when it is above 1.20, before Mario Draghi makes clear the timeline of its QE tapering.
Reason #5:US Treasuries’ largest foreign holders may continue buying towards year-end
After Chinese yuan has stabilised this year, nation’s capital outflow pressure is mitigated. Two reasons may drive Chinese central bank to buy US Treasuries, which is equal to buy dollar in near term. First, PBOC looks keen to defend its FX reserves at USD 3 trillion level. Second, PBOC may not be comfortable with its currency rising too quickly.
Our Picks
EUR/USD – Slightly bearish.
This pair may fall towards 1.1680. US CPI may offer support to dollar this week.
GBP/USD – Slightly bearish.
H4 chart is showing downtrend since middle of last month. This pair may test 1.3020.
XAG/USD (Silver) – Slightly bearish.
We expect price to drop towards 16.52.
XAU/USD (Gold) – Slightly bearish.
We expect price to fall towards 1268.
Top News This Week (GMT+8 time zone)
UK: Manufacturing Production MoM. Tuesday 10th October, 4.30pm.
We expect figures to come in at 0.3% (previous figure was 0.2%).
US: CPI YoY. Friday 13th October, 8.30pm.
We expect figures to come in at 2.1% (previous figure was 1.9%).
Fullerton Markets Research Team
Your Committed Trading Partner
Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade foreign exchange you should carefully consider your investment objectives, level of experience and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor.
Recommended Content
Editors’ Picks
EUR/USD steady below 1.0800 after US PCE meets expectations
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair barely reacted to US PCE inflation data, with the Greenback shedding some pips. Fed Chair Jerome Powell set to speak ahead of the weekly close.
GBP/USD hovers around 1.2620 in dull trading
GBP/USD trades sideways above 1.2600 amid a widespread holiday restraining action across financial markets. Investors took a long weekend ahead of critical United States employment data next week. Fed Chair Powell coming up next.
Gold price sits at all-time highs above $2,230
Gold price holds near a fresh all-time high at $2,236 in thinned trading amid the Easter Holiday. Most major world markets remain closed, although the United States published core PCE inflation, the Federal Reserve’s favorite inflation gauge.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.