Investors have been waiting for months for a USD rally. Expectations have kept building up as investors expected that the combination of tighter monetary policy, sustained gains in the jobs market and a tax reform would trigger a dollar rally. Unfortunately, it didn’t unfold as expected.
Despite the fact that Trump’s tax bill passed the House of Representative quite easily, it is far from a done deal, as the bill still has through the Senate next week. There is little doubt the outcome will be very close. The recent broad dollar weakness suggests that investors remain sceptical it go through easily.
In addition, the latest economic data came on the soft side. October durable goods orders (released on Wednesday) missed expectations. The headline gauge contracted 1.2%m/m compared to +0.3% median forecast. When excluding transportation, the gauge rose 0.4%m/m (0.5% expected); however, previous month’s reading was upwardly revised to 1.1%. A week earlier, October’s retail sales painted a mixed picture as the effects of the Hurricanes’ season is still distorting the data.
Finally, Fed members took their distance and have systematically avoided flooding the media with hawkish/dovish statements about the monetary policy outlook. The Fed has already started to reduce its giant balance sheet in October. However, it didn’t have much effect on the long-end of the yield curve. The central bank should also increase borrowing costs in December, which would bring the target band to 1.25%-1.50%.
On Friday, the greenback kept on grinding lower as market participants reacted to positive news from the euro zone and thin trading conditions due to Thanksgiving Holidays in the US. On the long-term, we believe that rising interest rates in the US will help to maintain buying in the dollar, especially against high commodity currencies such as the Aussie and the Kiwi. However, one should remain cautious regarding EUR/USD as the European economic conditions are finally improving. It wouldn’t be surprising to see a further euro gains in the next few months.
By Arnaud Masset