A reversal or a dead cat bounce?

31 August, 2017

The greenback weakness has been the primary focus in FX trading this year. On Tuesday, the dollar index fell to a 2.5-year low of 91.62, with losses exceeding 10% since the begging of 2017. The underperformance was a result of many factors, including the collapse of Trump trade, convergence in monetary policies, flattening U.S. yield curve and better economic prospects throughout the globe. 

The dollar found some support on Wednesday, after revised U.S. GDP figures showed that the economy grew 3% in the second quarter; the strongest pace in more than two years. Additional support came after the release of the ADP report, showing the U.S. private-sector added 237,000 jobs in August, a much better result than the expected 185,000.

Many traders are questioning whether the dollar has finally found a bottom, or will weakness continue to persist. In the short term, the answer will be determined by Friday’s non-farm payrolls report. After the ADP release, there’s a high probability that NFP will surprise to the upside. If we get a similar figure, it will be the third month in a row that the U.S. economy adds more than 200K jobs. However, wage growth has been the key missing ingredient in the employment figures, with very little growth shown over the past two years. Expectations are that we will see a 0.1% uptick for August, after being flat at 2.5% during the previous four months. A surprise in wage growth of 0.2% or above, will likely lead to the steepening of the yield curve and a further recovery in the U.S. currency.

On the longer run, the debt ceiling, tax reforms, and the trajectory of interest rates, will determine the direction of the U.S. dollar. S&P Global warned yesterday that a failure to raise the debt limit would be more catastrophic than the failure of Leman Brothers, and would push the U.S. economy back into recession. Although this might be little exaggerated given the past experiences, failing to raise the debt ceiling will undoubtedly have a negative impact on the economy. The 2013 government shutdown resulted in an estimated $24 billion in lost economic output according to S&P, so the longer the shutdown, the more severe the impact on the economy. Thus, the dollar will remain under pressure if the Congress didn’t come along within the next two weeks.

On Wednesday, President Trump made his much-anticipated speech on tax reforms. However, no details were offered beyond his willingness to reduce corporate taxes by 20%. Many economists believe that slashing corporate tax rate from 35% to 15% is an unrealistic plan and won’t get through Congress. If the President fails to deliver on tax cuts, his first year in Presidency ends without any significant legislative accomplishments, which is another reason why the dollar will remain under pressure.


Source link  
Markets await Powell perk up

Asian stocks are eking out slight gains after the S&P 500 continued easing off its record high, as investors await fresh reasons to...

Trade truce paints illusion of market stability

Some semblance of stability returned to financial markets yesterday as investors breathed a collective sigh of relief after US-China trade...

Global stocks turbocharged by hopes

Global equity bulls are continuing their unstoppable momentum into the conclusion of the trading week, as well-orchestrated, cautious remarks...


Gold pounce on Fed's easing bias

Asian currencies are now climbing higher after the Dollar index (DXY) fell below the psychological 97 mark during the Asian session, as the...

Emerging markets to jump

A collective sigh of relief has roared across financial markets after the Federal Reserve confirmed market expectations of the...

Markets turn defensive

The mood across financial markets is set to remain cautious as investors find comfort on the sidelines ahead of several major central bank decisions over the coming days...


Oil rebounds on geopolitical tensions

It has been a rollercoaster trading week for oil markets as investors tussled with conflicting fundamental themes pulling and tugging at the...

Markets hit by caution ahead of US retail sales data

The mood across financial markets was cautious this morning as rising geopolitical tensions in the Middle East and persistent...

Gold sinks to fresh weekly lows

Gold stumbled to a fresh one-week low on Tuesday as cautious optimism over global trade developments boosted risk sentiment and dampened...

  


Share it on:   or