USD in the doldrums as investors grow impatient
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.
Euro higher on strong German IFO Business Climate
Financial markets always tend to closely monitor German’s economic data not only because the country is always acting as the locomotive of the European economy but also because the current political uncertainties currently occurring in Germany. Indeed, Merkel has been unable to build a coalition within the Bundestag and new elections may occur in January.
This morning has been released the IFO business climate data which provides details concerning indicator of economic development. The data is very strong despite markets expected a slight deceleration. The data is now standing at all-time high.
Other German data are improving. German GDP printed at 0.8% q/q for Q3. German will likely record its best economic year since 2011. We mentioned yesterday inflation in the US which is increasing. It is the same thing that is happening in Europe.
Now that markets’ expectations are way more significant concerning the Fed’s monetary policy and we believe that there are room for disappointment, we believe the Eurodollar should continue climbing higher.
