Regime Change for the Dollar?

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Market Drivers November 28, 2018
Dollar selloff continues
EUR eyes 1.1400
Nikkei 0.39% Dax 0.09%
Oil $50/bbl
Gold $1226/oz.
Bitcoin $4220

Europe and Asia:
EUR GE Unemploymnet 5.0% vs. 5.1%

North America:
USD PCE 8:30
USD Personal Income 8:30
USD FOMC Minutes 14:00

Anti-dollar flows continued to dominate Asian and European trade but end of month demand for greenbacks blunted some of the rally as the EURUSD move stalled just ahead of the 1.1400 barrier.

The dollar was demonstrably weaker across the board after yesterday’s comments by Fed Chairman Powell that suggested US central may be closer to neutral rate than previously thought. The move rocked the dollar in yesterday’s markets and is likely to have continuation as traders begin to price in the regime change signaled by Mr. Powell.

Although Mr. Powell maintained an upbeat tone, the Fed clearly is becoming concerned about making a policy error. While the US economy continues to expand, the rate of growth is starting to decelerate and rate sensitive sectors like housing are rolling over. More importantly, as many analysts have pointed out high levels of corporate debt may starting to concern the Fed. Mr. Powell himself referred to the problem in the speech noting, “There are reasons for concern, however. Information on individual firms reveals that, over the past year, firms with high leverage and interest burdens have been increasing their debt loads the most (see figure 7). In addition, other measures of underwriting quality have deteriorated, and leverage multiples have moved up. Some of these highly leveraged borrowers would surely face distress if the economy turned down, leading investors to take higher-than-expected losses–developments that could exacerbate the downturn. “

All of this suggests that the Fed may pause after the December rate hike or perhaps go on once every six-month schedule in 2019 as it monitors data carefully. In either case, the signals from yesterday’s speech along with continued dovish rhetoric from Vice Chair Clarida suggest that the Fed policy has turned from unabashedly hawkish to mildly neutral and with markets positioned long dollars the dynamic calls for short covering rally into the year-end.

On the calendar today the market will get a look at US PCE data and Personal Income release. The PCE is expected to remain muted at 1.9% versus 2.0% the period prior but income is expected to rise to 0.4% from 0.2%. If the data misses, however, it will only embolden dollar shorts to press for the 113.00 figure in USDJPY as the lack of inflation and slowdown in growth will bolster their case in the wake of Powell comments.

Boris Schlossberg
Managing Director

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