Is the Dollar Bull Run Over?

Investors are bailing out of U.S. dollars and their recent moves are importantbecause some of the factors that drove the dollar higher this year are beginning to change and if that continues the dollar's bull run will be over. It is still too early to tell but the momentum is certainly skewed to the downside. There have been 4 main factors driving the dollar higher this year - economic outperformance, rising interest rates, equity market pressure and trade policy. Although the latest economic reports were decent with consumer price growth rising and consumer spending growing at its fastest pace in 5 months, core demand growth is not as impressive. But more importantly, Federal Reserve officials are growing less hawkish with Chair Powell expressing concerns about next year's headwinds last week and Vice Chair Clarida adding that there is some evidence of global slowing and they need to factor in the global outlook. Clarida in particular does not expect a big increase in inflation this year. With that in mind, both central bankers are still confident enough in the domestic economy to proceed with a December rate hike but there's a good chance that it will be accompanied by a less hawkish outlook. While there aren't any significant U.S. releases on the calendar next week (we primarily have housing numbers), this new sentiment could add pressure on the greenback in an otherwise thin trading week.

Sterling will continue to be one of the biggest stories as we wait to see if there will be a no confidence motion on Prime Minister May. Last week, the British pound dropped more than 1.5% in one day as Prime Minister May's Brexit deal dissolves into flames. The situation is still evolving but as our colleague Boris Schlossberg note, "Tory MPs may have enough votes - 48 are needed - for a letter of no confidence that would force a vote in Parliament. If the rebels within her ranks really do have the votes to force a no-confidence motion UK politics will be thrown into an even greater existential crisis. Even if PM May were to survive the vote, it would almost certainly suggest that a general election will be called as Ms. May's minority coalition partner the DUP vehemently opposes the current deal and will likely leave the government. The prospect of a general election ahead of the Brexit deadline in March would only create more chaos in what is already a highly volatile situation. The initial reaction in the market would likely send cable towards the 1.2500 level." Data has also been terrible with CPI growth easing and retail sales falling. If this data trend continues, it will be difficult for GBP to sustain any recovery.

Despite all of the UK's troubles, it was a great week for the euro, which closed above the 20-day simple moving average for the first time in over a month. The currency was completely unfazed by last week's softer economic reports including Germany's ZEW survey, Q3 GDP and Eurozone trade balance. Euro traded almost exclusively on anti-dollar flows and risk appetite and we expect the same in the coming week as the currency looks past any weakness in Germany's PPI report or Eurozone PMIs. With stocks recovering and the dollar turning lower, we see EUR/USD hitting 1.15 and possibly even 1.1550.

All 3 of the commodity currencies traded higher on Friday with the Australian hitting a 2 month high and the New Zealand dollar hitting a 4 month high. AUD and NZD ripped higher on the hope that President Trump will forgo another round of tariffs on China. Ever since the Midterm Elections, his tone towards China has been softening. According to President, China has sent a list of things they are willing to do on trade because they want to make a deal. He thinks the list is pretty complete and said the US hopes to make a deal trade but it is not acceptable yet. With that in mind, Trump added that, "US may not have to impose further tariffs on China." We know how this game is played and its hard to believe that the trade war is over until both sides make it public and official. Nonetheless, there are 2 weeks to go before the G20 meeting and we believe that trade talk optimism will continue to carry AUD and NZD higher. In terms of USD/CAD, on a technical basis, it appears to a have peaked at 1.3260. After climbing to a 3 month high mid week, the rally in USD/CAD fizzled on the back of U.S. dollar weakness. Given the currency's recent weakness and the slide in oil prices it is easy to forget that the central bank is hawkish. At their last monetary policy meeting, they said "the policy interest rate will need to rise to a neutral stance to achieve the inflation target." This view will be put to test at the end of this week with the release of Canadian CPI and retail sales. Good numbers would confirm the top and take the pair to 1.30.