Can the Dollar Rally Continue?

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Market Drivers May 1, 2017
US reaches budget deal
Chinese PMI data misses
Nikkei 0.59% Dax closed
Oil $49/bbl
Gold $1264/oz.

Europe and Asia:
CNY PMI Manufacturing 51.2 vs. 51.6
CNY PMU Non Manufcaturing 54 vs.55.01

North America:
USD PI/PS 8:30 AM
USD PCE 8:30 AM
USD ISM Manufcaturing 10:00

It’s been a quiet start to the trading week with most of Europe closed for May Day labor holiday. The price action was mainly contained to USDJPY which saw strong rally in Asian session after US lawmakers announced that they reached a budget deal that would fund the government through September. USDJPY spurted to a high of 111.92 on relief rally flows but stopped just shy of the 112.00 level in morning European dealing.

The eco calendar was barren today with only Chinese PMI data on the docket today. Both the Manufacturing and Non- Manufacturing PMI’s missed their mark with the former coming in at 51.2 vs. 51.6 while the later printed at 54 versus 55.1 the period prior. Although the PMI dipped slightly, activity remained above the 50 boom/bust line and markets ignored the news with Aussie rebounding above the .7500 figure by mid-morning London dealing.

Price action should see a boost in North American trade today as both Treasury Secretary Mnuchin speech as 11:45 GMT as well some US data should the markets more lively as the day proceeds. In US session today traders will get a look at Personal Income and Spending data as well as core PCE numbers. Dollar bulls have made much noise over the fact that US inflation data has crept higher, but today’s PCE numbers could reverse that trend with consensus view looking for -0.1% print.

Since last Friday’s 1st round win by Emmanuel Macron, the markets have been on a risk-on tear with 10 year yields rising nearly 20 basis points off their lows, Fed funds futures pricing in a greater than 75% of a rate hike and USDJPY up more than 200 pips – yet the underlying economic picture has not changed. If anything US data appears to have deteriorated with Citibank’s economic surprise index now in negative territory. Given the general slowdown in US economy and lack of any obvious immediate catalysts to spur growth, it’s difficult to see how the Fed will remain so unabashedly hawkish going into the June meeting.

This week will provide policymakers with a slew of data including both employment and wage growth numbers at the end of the week, but unless they are markedly better than forecast, the FOMC may chose to hold off on any tightening action until September and when that becomes obvious to the markets, USDJPY is likely to drift back to the 110.00 level as disappointment sets in.

Boris Schlossberg
Managing Director

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