The dominating dollar

October 11, 2016

There is little standing in the way of the US dollar at this point in time. If we look at the past seven sessions on the dollar index, where we’ve seen a 1.7% increase, there have only been three other brief prior periods during the year when we’ve seen a similar pace of appreciation. Several factors are at play here, not least the building expectation of a December rate hike from the Fed, together with the latest polling following the weekend TV debate in the US, which has put Clinton more firmly ahead. Short-term at least, a Clinton presidency removes the uncertainty that would prevail on a transition to Trump, so for the moment at least, markets are taking this well. Furthermore, as I pointed out last week, the US 2Y treasury yields has further to increase if we are to more confidently price a December tightening, over and above the 1.00% level and the past week has seen further travel to that direction (currently 0.86%).

Elsewhere, the latest push higher on oil prices has seen the Canadian dollar push further ahead, with the Brazilian real not that far behind. Brent pulled back from just below the USD 54 level yesterday, but the recent uptrend remains intact, providing ongoing support to commodity currencies. Russia and Saudi have made a joint pledge to limit production, which is also providing support. At the other end of the scale, sterling continues to move lower, both against the dollar and also the single currency. There are no major releases on the calendar today likely to upset this underlying tone, both to the dollar and sterling, but the latter especially does remain vulnerable to some correction higher given the level of short positions built up over recent weeks.

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