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
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.