In today’s Weekly Outlook we consider the progress of the dollar rally. What are the key factors impacting on forex, equity indices and commodities in the coming days.
The condition of the medium term bull run on the US dollar is becoming increasingly questionable. The fact that the dollar sold off for much of last week even after US earnings growth hit multi-year highs and Treasury yields were pushing higher, is a cause for concern if you are a dollar bull. The market is all but pricing a 100% probability of a Fed rate hike at the September meeting next week. The market is also 80% sure of a December rate hike now and there could be a further one, maybe two hikes in 2019 towards 3%. However that is likely to be where the Fed stops and it seems that the market is ready for it. So, there seems little to be gained for the dollar bulls on the monetary policy front. The latter stages of a tightening cycle is when a currency begins to lose performance. Much of the run higher of recent months has been born of the trade dispute, capital flooding out of emerging markets and into US assets. However, is Trump threatening to go all in going to be seen as the beginning of the end? If so, global investors will begin to understand where they need to be positioned. Will it be at that stage that the market sees the need to take account of the expanding US twin deficit? According to CFTC net dollar futures, there is a significant net long dollar position that has now started to unwind for the past two weeks. This is seen as a “smart money” indicator coming from hedge funds. This is the first time there has been a reverse in this positioning since April. If this continues to unwind then there is likely to be a significant dollar correction coming.
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