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DX 1Q 2017


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A day for watching and reacting rather than trying to make predictions as Trump due to make a number of speeches (no reliable timetable). Watchers will be listening for hints on possible future changes to trade agreements, tax changes (personal and corporate) and relations with China and Russia. Uncertainty likely to continue next week and into FOMC mtg Feb 1st.


DXY again eyeing the long term support/resistance level 10050 (from the monthly chart since early 2015).


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EUR USD is playing an interesting pattern. It is unlikely that this trend has changed from its bearish trajectory, but does look as if their is some more juice left in this bullish trade. Because Trump could announce a series of measures they could act as a catylist for either direction, but most likely this will be dollar bullish, which therefore would send dollar crosses including gold and treasuries lower.

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When you hear everyone calling parity that is exactly when you need to seriously question the positioning of the market. As you could see with cable, such heavy short positioning ended up in a squeeze. Trump knows all to well that a strong dollar is bad for exports and even though he may fail to stall the dollars bullish trajectory, he will without doubt do his best. Hence why we will struggle getting down to parity anytime soon.

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Strong dollar may prove Donald Trump’s match

Sustained strength of US currency may provide an obstacle to president’s plans


Richard Nixon’s Treasury Secretary John Connally once told foreign counterparts that the US dollar is “our currency, but your problem” — a blunt observation that has often rung true. Under President Donald Trump it may no longer be so simple. The new US president inherits a subdued but long economic expansion, low but accelerating inflation and a robust jobs market, which will probably force more interest rate increases in the coming years. But the dollar may well prove Mr Trump’s biggest economic challenge, and the vast $5tn-a-day currency market will be harder to browbeat into submission via Twitter outbursts than corporate chieftains and political opponents. “Of all the things that drive a currency, a policymaker’s opinions is not in the top 10,” says Marc Chandler, head of currency strategy at Brown Brothers Harriman. There are plenty of analysts who believe the US economy is relatively impervious to higher interest rates and bond yields, partly because of the prevalence of fixed-rate borrowing. But faster growth and rising rates are likely to suck in foreign capital and lift the dollar. This could prove a far bigger potential headwind.


A 2015 study by the New York Federal Reserve calculated that a 10 per cent dollar appreciation over three months knocks roughly 0.5 percentage points off the growth rate over one year, and another 0.2 percentage points the subsequent year if the currency strength persists. Moreover, the, New York Fed’s researchers stressed that even this estimate does not include the impact on domestic investments by US companies hurt by a stronger dollar. “Most US borrowers aren’t that sensitive to interest rates, with many locking in low rates already. The biggest impact will be via the dollar, which hits manufacturing,” warns Joachim Fels, Pimco’s global economic adviser. Restoring US manufacturing and improving the trade balance are central to Mr Trump’s plans, and it is clear the administration is concerned over damage a stronger greenback can wreak. The president had already questioned the US government’s longstanding policy to at least voice support for a “strong” dollar, but this week he went further. On Monday he declared that the currency was too high, preventing US companies from competing with Chinese rivals. “It’s killing us,” he said in an interview with the Wall Street Journal. But underscoring just how tricky the administration’s policies and messages will be to parse for markets, Steven Mnuchin, Mr Trump’s nominee for Treasury Secretary, then reiterated the more traditional “strong dollar” position at his Senate confirmation hearing.


Verbal jawboning is likely to get more aggressive and frequent if the dollar continues to climb, but absent co-ordinated intervention among the biggest countries in the world — not unprecedented but improbable given the new administration’s rhetoric and other countries’ desire for weaker currencies — is unlikely to have a lasting impact, analysts say. “Mr Trump, as far as anyone can tell, would quite like a weaker dollar and higher rates. But it’s the policy choices he makes rather than his personal preferences that will determine what actually happens,” notes Kit Juckes, a strategist at Société Générale.

Of course, not everyone is convinced that the dollar’s run will go much further anyway. The DXY dollar index has already climbed 26 per cent since mid-2014, thanks to the country’s economic and interest rate divergence from its major counterparts. The dollar index is now about 3 per cent above its five-decade average, and a net 22 per cent of investors polled by Bank of America think the dollar is already overvalued, the highest since 2006. Indeed, betting on the US currency was also voted as the most crowded trade at the moment. Nonetheless, while analysts are uncertain of just how much of the new president’s touted economic policies will actually be implemented, most agree that the dollar is likely to strengthen as a result.


Deutsche Bank’s Alan Ruskin points out that the greenback has now entered the ranks of the top three G10 high-yielding currencies — typically an omen of further strength. As a result, he predicts that it will be a “King Kong” in FX markets this year, swatting most of its counterparts aside, breaking parity to the euro and approaching new all-time highs versus the Japanese yen. Even strategists that are more sceptical of the “Trump trade” of betting on faster growth, quicker inflation and interest rate increases are wary of standing in front of the dollar steamroller — at least for now. “We saw with the Japanese yen in 2012 and 2013 that the market’s belief can remain unfaltering even when results are mixed. Hence, we would not stand in the way of the dollar rally, even if we are ultimately not that convinced by the reflation story,” according to David Bloom, HSBC’s chief currency strategist. But Mr Bloom believes that most of the greenback’s gains will come in the first half of the year, as the cold, hard reality of US governance begins to undermine investor confidence. “The first half will be full of euphoria, optimism and hope. The second half should see the dollar give back some of its gains as the bureaucracy of office and economic reality kicks in,” he predicts.


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FOMC tomorrow, DXY holding on to 10,000 for now. Rates expected to remain unchanged but price will respond to any clues as to the number of possible rate rises this year. Hawkish (more) could see a breakout of the descending trendline, dovish (less) could see a big move down to the counter trendline.


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Interesting isn't it, was yesterday the first salvo in a new currency war? (Britain is winning so far). As you've mentioned before, Trump thinks the dollar is too high and yesterday his man accused Germany of deliberately suppressing the Euro (true) which caused the big bear bar.

I note the DX bottomed yesterday at the low of the 8th Dec at 9930 (so it touched the 9900 zone) and has stalled, waiting, FOMC tonight but also NFP Friday, watch the ADP non-farm today at 13:15 for a clue.

I see the trend channel lines as initial targets on a bullish or bearish move, USD pairs to respond accordingly. 

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The FOMC decision is due at 2 pm ET (1900 GMT)


Morgan Stanley: Fully Flexible Fed, We Continue To Buy USD Dips.

Today's release of the Fed statement will be in focus. If the Fed wants to remain fully flexible it may need to increase, via its communication, the market probability of seeing the Fed acting in the spring. Hence, the USD will remain within a whipsawing environment in which we continue buying the dips.

TD: No Change From The Fed, No Strong Reaction From Market.

Focus turns to the Fed this afternoon. We expect the Fed to keep policy unchanged. More importantly, Fed officials are probably closely watching the Congress and administration mull the potential policy actions that are likely to impact the outlook for monetary policy over the coming year. Recall, the Dec meeting saw the Fed dot plot stabilize (and actually move higher), suggesting a more hawkish Fed tone in the wake of the election. Still, markets have priced in nothing today and have penciled in a 29% chance of a hike in Mar. Our base case is that the Fed passes on Mar and hikes again in Jun so no fireworks at today's meeting. That means a steady wait and see approach. We view the statement as a exercise in marking-to-market the Fed's views of the outlook so no big changes are expected. On a surprise, our bias is to expect a more hawkish tone given the inflation outlook. A hawkish surprise would indicate the Fed is leaning towards a Mar hike that is likely to boost the USD. All told, we don't expect a strong reaction from markets but on average the Fed has been a negative event for the USD this year. An upbeat Fed message and solid data are the remedies needed to steady the ailing greenback this week.

SocGen: Fed In Wait-And-See Mode.

the FOMC meeting is today's main event even if lots of people aren't paying attention. They won't change policy, they will remain in wait-and-see mode, but inflation is rising and the economic data are solid...We still think the outlook for the US dollar in 2017 is mainly a function of whether the US economy is going to be strong enough to encourage the FOMC to tighten enough that real 10- year yields rise towards 1%. If that's the case, the dollar rally's got another 5-10% in it, DXY targets are still for a peak in a 106-110 range, with USD/JPY peaking below 130 but above 120.

BTMU: FOMC To Maintain An Upbeat View.

What will be far more telling from an FOMC monetary policy perspective will be the hard data and in particular the hard data on employment and wages. If we are correct and the US economy is effectively at full employment that will lift wage growth more notably, then the scope for the FOMC to remain patient will be very limited indeed. That realisation is likely to help underpin the divergence trade and remind market participants that even excluding Trump reflation prospects, the US economy was strengthening to a degree that no longer warrants the current level of monetary accommodation. The FOMC statement this evening is likely to maintain its more upbeat view of the economy reinforcing the message from the Fed that it will be more active in lifting rates this year than in 2015 and 2016.

Credit Agricole: NFP To Be A bigger Driver Than FOMC.

We expect the FOMC to take a minimalist approach this week, keeping rates steady and making few changes to the policy statement. Chair Janet Yellen recently argued that there are few signs that the labour market is overheated, which means the Fed should be in no hurry to follow up the December hike with another one, preferring instead to wait for more data. In the end, next Friday's nonfarm payrolls report may prove to be the bigger driver. Our economists expect a gain of 175K, with the growth in average hourly earnings slowing slightly to 2.7% YoY. in.

Goldman Sachs: FOMC Holding Pattern.

The FOMC will very likely keep policy unchanged on Wednesday, and make only modest revisions to the post-meeting statement. We expect constructive comments on economic activity, and possibly, a shift to say that headline PCE inflation will reach 2% "relatively soon" (instead of "over the medium term"). We expect the balance of risk assessment and characterization of current policy ("accommodative") to remain unchanged.

BofA Merrill: No Fireworks From FOMC But Could Be A Reprieve For USD.

We do not expect fireworks from the upcoming FOMC meeting. The Federal Reserve will be releasing its statement without a press conference or Summary of Economic Projections (SEP), which offers market participants less information to digest. We do not expect policy changes, with the FOMC holding rates at the 50-75bp range and maintaining the reinvestment policy. However, we do expect changes to the language. In particular, we think the Fed will highlight the reduction in labor market slack and perhaps note that confidence measures have improved. In our view, these changes would be perceived as a bit more hawkish. The market is pricing in just over two hikes this year and another two in 2018. We similarly look for four hikes over this year and next, but believe the risk is for a faster cycle to start next year. If the communication sounds modestly more hawkish, we expect it to result in a further steepening of the near-term path of monetary policy and believe it could increase market-implied probabilities for a March hike...The minor tweaks to language, as described above, could lend a slightly more optimistic tone, potentially suggesting some upside risks to FOMC pricing. While FX moves are likely to be limited, a more confident tone could provide some reprieve to the USD as the market refocuses attention on the balance of risks around Fed policy, which we continue see as skewed toward faster hikes on growth-positive fiscal stimulus.

Nomura: Expect Few Changes From FOMC.

We expect the FOMC to keep the federal funds target unchanged at 0.50-0.75% at the conclusion of the 31 January -1 February meeting. The data on economic activity and inflation since the last meeting have been in line with expectations. We anticipate few changes in the FOMC's statement overall: The paragraph on current economic conditions (the first paragraph) should be updated modestly to reflect recent developments. But we expect the general thrust of the paragraph to be unchanged. The labor market has continued to strengthen and economic activity expanded at a moderate pace. For the economic outlook (the second paragraph), we also expect only minor changes. The most recent inflation data suggest that inflation continues to very gradually creep up towards the 2% target. We expect the risk statement from the December meeting, "Nearterm risks to the economic outlook appear roughly balanced," to be repeated. 

Barclays: We Don't Expect Any Changes From The FOMC.

This week, the FOMC meeting could remind markets that risks are titled in the long-run towards a stronger dollar, through the possibility of more rate hikes, but the White House unpredictability has led investors to pare back short EURUSD positions since the beginning of the year. The most important event will likely be the FOMC meeting on Wednesday in which we do not expect any change in policy. In this regard, our economic team recognizes that there was a notably hawkish shift in tone from the Fed at its December meeting. In addition to believing that cumulative progress toward the dual mandate justified a rate increase, the FOMC views signaled that monetary policy will not be passive in the face of expansionary fiscal policy. We expect no change in the target range for the federal funds rate this month. Instead, we believe that the statement will reflect the view that the labor market is at or near full employment. Regarding inflation, we look for a modest upgrade to reflect recent trends, but believe the committee sees this as mainly a mechanical passing of base effects from energy prices and currency movements. At the moment, markets (fed fund futures), price in a 70%+ probability of two hikes, roughly in line with Barclays expectations in 2017. 

SEB: Fed In Wait-And-See Mode.

We expect no change in policy at today's FOMC meeting. The minutes of the December meeting were dominated by great uncertainty about US fiscal policy and the Fed appears to be in a wait-and-see mode until more details of Trump's proposed fiscal stimulus emerge. However, the minutes also indicated stronger growth optimism, which was not dependent only on "Trumponomics". Fed's own forecasts indicate three rate hikes in 2017. For the time being, we stick to our forecast that the Fed will hike twice in 2017; in June and December. The Fed has so far been very cautious about tightening and USD appreciation risks slowing down both inflation and growth. An alternative way of tightening monetary policy is for the Fed to start shrinking the balance sheet but our view is that it is too early for such a policy change at this meeting.

Scotiabank: USD To Take Its Cue From FOMC Statement; Dips A Buy.

The USD will take its cue from the policy statement and how the Fed characterizes the economic outlook...Despite the USD setback in recent weeks, we think underlying fundamentals remain positive. Although we concede that the risk of more, near-term corrective weakness in the big dollar cannot be excluded, we still rather think that USD dips are a buying opportunity.

Lloyds: No Surprise From FOMC.

Having raised the benchmark interest rate at its last meeting and with no press conference scheduled today, they are unlikely to spring any surprises. More broadly, the FOMC's willingness to tighten policy further is likely to be restrained for now by a lack of detail around the fiscal and trade plans of the Trump administration. That said, the accompanying statement will be pored over for clues about the timing of the next US rate rise. We expect only small changes to the statement on this occasion and do not expect the FOMC to give a clear indication that an interest rate hike at its next meeting in March is likely.

RBC: Expect A Slight More Hawkish Stance.

The FOMC announcement will be the main focus, but this is a "short" meeting so there will be no press conference or forecast updates to digest. The Fed is likely to continue to strike a positive tone on the economy and may upgrade its inflation characterisation toward a slightly more hawkish slant in the wake of headline CPI now breaching 2%. We expect no discussion of balance sheet adjustment in the statement.

UniCredit: A Cautious Fed; Further USD Downside This Year.

Turning to the FOMC meeting today, the statement is likely to reiterate that the US economy's health is close to the Fed's goals and that the committee will continue to normalize its policy stance. Progress on the economic and inflation fronts could make the statement a little more hawkish. However, the FOMC will continue to emphasize that economic conditions are evolving in a manner that will warrant only gradual increases. We continue to see a cautious Fed, especially since the composition of voting members in the FOMC is more dovish than it was in 2016, and maintain our view that the next Fed rate hike will come only in June. In our view, the statement is unlikely to offer a turning point for the dollar. Political uncertainty and rhetoric by the US administration is likely to keep injecting volatility, but we continue to see further USD downside over the course of the year.

BNPP: A Hawkish Fed; Staying Long USD Via Options.

The USD could start benefiting from potentially a more hawkish Fed rhetoric. Our FX Positioning Analysis shows USD long positioning has now been cut back substantially, with the score now at +1 (on our scale of -/+ 50). We therefore recommend taking advantage of current USD weakness to build USD longs and remain long the USD vs EUR, JPY, CAD and AUD via option.

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Good 10 min vid by DailyFX's Chris Vecchio  on current FX view re; USD, Euro and JPY and considers Fridays mtg Trump & Abe. (read currency wars).

Trump has named Japan and Germany as currency manipulators (correct).

DXY trying to bottom and lift but will depend on Euro.


Can Germany keep southern euro zone in chaos and therefore keep euro depressed to boost Ger exports? My view, not Chris's.




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DXY running up to major resistance at 10170, a push through will correlate with further Euro and Pound downside this afternoon. Yen having shown continued strength this morning may start to consolidate. US open likely to trigger DXY breakout or reversal.

FOMC minutes from last mtg at 7pm but there seems little interest from commentators this time round. 

DXY 4 Hour.


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