The Running of the Dollar Bulls ?

The Running of the Dollar Bulls?

Not quite the running of the bulls as yet but indeed unambiguous signals are building to support the firm USD view. While the markets remain cemented within recent trading ranges, the pendulum is soundly swinging in favour of the dollar as the stars continue to align in support of this view.
Heading into NFP, market forecasts are stunted given the likelihood of the hurricanes distorting the data. None the less, it has been difficult to overlook this week’s stellar US economic data as both ADP data, and weekly initial jobless claims have been surprisingly buoyant. But perhaps the most astounding signals are generating from this week’s ISM PMI’s that clocked in at 12-year highs. One can only assume that more positive economic data surprises are just around the corner.

Fed Williams took to the wires overnight and was unquestionably hawkish in his view not only supporting the 2017 December rate hike but lobbying for three more nudges in 2018. But it was his mention that the risk for asset price bubbles that was especially hawkish as it supports the view that the Feds are no longer single-mindedly focused on inflation for policy guidance.

With the markets woefully underpriced the Fed dot plots, a more aggressive lean from the FOMC would offer up a smorgasbord of opportunities for the dollar bulls who would most certainly have sights set on AUD, EUR and GBP, the current weak links.

Inter-party GOP squabbling has subsided as the US House has taken essential steps setting the stage to roll out a determined tax-overhaul bill which should pass without Democratic backing. Of course with this greater confidence comes a more significant fall but the level of GOP impudence this time around suggests a done deal.

Non-Farm Payroll

Since some hurricane impact is anticipated on the data any blemish on payrolls will most certainly be sidestepped. The tail risk, however, may come from a better than expected wages reading. Make no mistake AHE tends to give FX traders the clearest signal on NFP and this pattern should hold true even more so today. Since the wages reading has been exceptionally soft, any upside surprise will likely generate an outsized move on the USD.

Balance of Risks

Euro

The single currency remains weighted down by the “Pain in Spain” driven by  Catalan consternations. But let’s not overlook the above-trend amplification of the US economy which has contrarians coming out of the woodwork now thinking FED -ECB policy divergence as opposed to convergence. US Treasury yields continue firming, and the inflationary expectations from the  US tax reform are expected to provoke a further rise. While EURUSD should remain under pressure given this scenario, the EURO bulls are unlikely to give up the plot preferring to hold on  for the October ECB

Australian Dollar

The buoyant US dollar along with the acutest declines in domestic retail sales in the past four years has the Aussie trading below the fundamental .7800 level in early APAC trade. On the US side of the equation Fed repricing, supportive US economic outlook and a budget resolution paving the way for tax reform has US dollar bulls champing at the bit.

Japanese Yen

Despite election jitters, the rise in US yields and the firming USD should remain the aggressive driver for this trade. While a top side breakout appears imminent its hard to overlook the election poll risk as we near election day.