With unemployment likely to continue at record low levels, growth continuing, and inflation near the central bank’s 2% target, Long USD/JPY?
During a question-and-answer session on Wednesday in Dallas, Fed Chairman Jerome Powell said the US economy is strong but could face potential headwinds, particularly from abroad.
Powell enumerated a set of concerns that have begun to arise among Fed officials as they debate how much further and how fast it would take to raise their short-term policy rate. Furthermore, he also described the global picture as a “gradual chipping away” at the pace of growth but said it is “not a terrible slowdown”.
In our opinion, we feel that the dollar will continue to strengthen until the end of the year due to four reasons:
Interest rate hikes are expected to continue into 2019 with the earliest confirmed hike in December. With the US economy still running hot and a tightening labor economy, it is unlikely that we’ll see hints from Fed on peak rates being reached anytime soon.
We saw stronger economic data over the past few days with the US CPI coming in at 0.3%, versus the previous 0.1%. US PPI also surprised the market, increasing to 0.6% in October, the highest in six years. If retail sales released tonight are good, this could bring USD/JPY to 115.00 price level.
No changes in Trump’s trade policy expected with the midterm elections having just ended, with Democrats winning the House and Republicans winning the Senate. We could expect collaborative attitudes by President Trump and the Democrats as they recognize each other’s powers to promote or stifle policy progress.
CFTC data (6th November) showed that hedge funds and speculators boosted net long positions on the dollar, which rose from 27,904 to 300,479 – the largest bullish position since January 2017. Furthermore, the stronger dollar continued to eat away at corporate earnings, keeping stocks under pressure and increasing the risk of triple-digit down days that will cause investors to flock to US dollars.
