Dollar Snaps Back on Strong Data But….

Dollar Snaps Back on Strong Data But….

.

When the U.S. dollar pulled back on Monday, we said dollar bulls remain in control and today they took USD/JPY above 113. The greenback had originally traded higher against many of the major currencies but its rally fizzled into and after the European close. The latest U.S. economic reports were strong with third quarter GDP revised up to 3.2% from 2.9% and consumer confidence jumping to a 9 year high of 107.1. These improvements confirm that a rate hike is coming on December 14th. They also boost the chance of further tightening in 2017 but with Fed fund futures only pricing in a 30% chance of another hike by May, investors see a hike followed by a long pause from the Fed, which is the biggest problem for the dollar.

So while the uptrend for the dollar remains intact the mighty buck is also having a difficult time extending its gains beyond last week’s highs. This makes it extremely important for buyers and sellers to be patient and wait for the right levels to get into their trades. For USD/JPY that means waiting to buy near 111.90 as an aggressive entry or 110.75 for a more conservative entry with better risk reward but a lower chance of trigger. For EUR/USD, the current recovery could extend as high as 1.0720 before stopping. The fact that the U.S. dollar and U.S. yields cannot rally on today’s strong economic reports is disconcerting and another reason why it is important to be selective with entries. On the other hand, USD/JPY should drop to 112 so there could be an opportunity to bet on a deeper pullback in the dollar overnight. However don’t expect a much deeper slide because the dollar could see another boost from Wednesday’s ADP, personal income, personal spending, Chicago PMI, pending home sales and the Fed’s Beige Book reports.

U.S. economic reports may be important but the main focus tomorrow will be on OPEC and the Canadian dollar. The final day of pre-negotiations is over and some of the best OPEC watchers in Vienna put the odds of a deal at 50:50 according to Bloomberg. Iran and Iraq have softened their stance but according to the Wall Street Journal, “it may not be enough to satisfy Saudi Arabia’s demands for a broad based oil production cut.” Iran is only willing to freeze production and not cut it, which has necessitated another informal meeting hours before official talks take place. It’s the 11th hour and the fact that it has come down to the wire is making oil bulls nervous. Oil prices dropped more than 3.5% today, taking the Canadian dollar down with it. However the market is very short oil so if a deal is reached, regardless of how large or small the production cut may be, oil could soar, sending USD/CAD sharply lower. If OPEC nations agree to freeze and not cut production, a rally in oil is likely to be short-lived and if the meeting ends with no deal, expect oil to drop to a 2 month low and USD/CAD to take out 1.35. OPEC’s decision will also completely overshadow Canada’s monthly and quarterly GDP reports even as growth is expected to rebound sharply in the third quarter.

Meanwhile as the Australian dollar ended the day unchanged, the best performing currency today was the New Zealand dollar, which rose nearly 0.75% versus the greenback. Outside of month end flows, there was no specific catalyst for the move. The explanation is possible positioning ahead of today’s RBNZ Financial Stability report and the speeches from Finance Minister English and RBNZ Governor Wheeler. Investors are clearly banking on optimism from New Zealand policymakers and hawkish comments from the RBNZ. New Zealand business confidence is also scheduled for release along with Australian building approvals.

Sterling broke above 1.25 while the euro rallied against the U.S. dollar for the third day in a row. Stronger than expected U.K. lending data helped to lift sterling as mortgage approvals rose 67.5K, up from 63.6K the previous month. Economic optimism in the Eurozone fell slightly while consumer prices grew at a slower pace but none of that mattered on a day when profit taking on long dollar positions drove currency flows. Eurozone CPI, German unemployment and retail sales numbers are expected tomorrow – given the rise in the employment component of the PMIs, we look forward to fewer job losses and good data could take EUR/USD to 1.07.