The US dollar is performing strongly once more, but is this underlying strength of the greenback or simply due to weakness elsewhere? We consider the outlook for forex, equities and commodities markets this week.
The US dollar has been in a sweet spot in recent months. Looking past near term corrective moves, remaining long dollar has been fruitful. CFTC net dollar futures show that long dollar positions continue to expand and which should help to at least prevent any decisive profit-taking. However, the dollar is suddenly facing a series of key bullish driving forces drying up. If President Trump is serious about a potential agreement with China over trade then this is dollar negative. This now comes with the Democrats grabbing control of the House, which will crimp any hopes Trump may have of tax reform version 2.0, restricting prospects of further fiscal expansion (that has driven yields higher). If this means that longer dated yields rise less aggressively (or perhaps even range) then the dollar will struggle to find sustainable upside traction. One key variable here is inflation, bringing focus on CPI this week. Wages are rising nicely now, but inflation still seems hard to come by. Europe is losing economic traction, whilst the PPI data out of China last week also suggested signs of slowdown in the world’s second largest economy. Can US inflation sustainably increase in these conditions? With the positive aspects of tax reform dissipating in 2020, US growth is expected to slowdown as the Fed is expected to reach 3% on rates. The US yield curve is unlikely to sustainably steepen next year as traders look ahead with trepidation. Where the US is an economic outperformer for now, the dollar bulls may retain control for the new year, but traction is likely to dissipate in the coming months.
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