The US dollar fell against all the major currencies last week. The downside reversal after the employment data on October 6 set the stage for the pullback. From a fundamental perspective, we cautioned the good news for the dollar had been discounted. With two months before the December FOMC meeting, the market had priced in a high degree of confidence (over 80% chance at its peak) of a hike and the 10-year yield reached the top end of its six-month trading range near 2.40%.
The ECB meeting on October 26 is the next key policy focus. The ECB is expected to reduce the amount of asset is buys starting next year. While officials may try to facilitate a dovish interpretation of its tapering, it is not clear that they will succeed. The speculative participants, judging from the positioning in the futures market, remains favorably disposed to the single currency. The net long speculative position was the largest in six years as of October 10.
There also appears to be growing skepticism over the prospect of tax reform in the US. One of the controversial measures that the White House proposed was to eliminate the deduction (from Federal tax obligations) taxes paid to state and local government, is reportedly being reconsidered. As was the case with health care, the debate within the Republican Party is key as it seeks to take full advantage of its majority position and sideline the Democrat minority. The IMF’s latest World Economic Outlook dropped its assumption that the US will deliver fiscal stimulus next year.
The Dollar Index snapped a four-day drop on October 12 and managed to close higher on October 13, despite the fact that the core CPI did not rise as economists forecast. The last leg up in the Dollar Index began on September 20 near 91.50 and peaked after the employment report close to 94.25. The low before the weekend frayed the 50% retracement (~92.90). The 61.8% retracement is closer to 92.25.The MACDs and Slow Stochastics on the daily bar charts are moving lower, and the five-day moving average appears poised to fall below the 20-day average in the coming days. That said, we remain impressed by the fact that the technical indicators on the weekly charts, especially the MACDs and Slow Stochastics, remain quite constructive for the Dollar Index.
