USD: Extended rebound – Natixis

Research Team at Natixis, notes that the US dollar has continued to appreciate against most currencies against the backdrop of an improvement in US growth.

Key Quotes

“The General Business Conditions Index in the Philadelphia Fed Business Outlook Survey improved sharply in October, while existing home sales were higher than expected in September. The news flow did not, however, lead to a sharp rise in the probability of a hike in the Fed Funds rate in December, which remains at around 67%. Donald Trump’s vicissitudes having benefited Hillary Clinton, this is probably what contributed to the firmness of the US dollar. A victory of the Democratic candidate would guarantee a further normalisation of the Federal Reserve’s monetary policy.

This week, the market will focus on macroeconomic indicators, in particular the first estimate of Q3 GDP, which is expected to come in at 2.6%, up from 1.4% in Q2, confirming therefore that growth is picking up. In this context, upcoming speeches by FOMC members are likely to be hawkish, as they are likely to call for a normalisation of monetary policy, especially since inflation is set to rise on the back of crude oil prices.

In the short term, there is nothing that can stand in the way of the US dollar’s appreciation other than a victory of Donald Trump or disappointing employment figures (i.e. less than 100,000 job creations). In this environment, the greenback has upside potential, especially if equity markets end up being upbeat, buoyed by encouraging quarterly earnings reports. Long positions on the US dollar rebounded sharply last week and can be expected to increase further in the short term, i.e. in the run-up to the FOMC meeting on 2 November (which is expected to adopt a hawkish tone) and the publication of the Employment Situation Report on 4 November.”