Intraday Market Thoughts

What’s the USD Upside?

by Adam Button
Oct 4, 2017 22:31

Another sizzling US economic data point was brushed aside because of storm-related effects but we evaluate how high the dollar could rise if the economy really is heating up. AUD was the top performer while CHF lagged. Aussie retail sales and trade balance are due up next. The latest Premium members video below charts how far and how long will the USD correction be. It also highlights the Premium trade issued today.

US ISM non-manufacturing survey hit a 12-year high on Wednesday. It was at 59.8 compared to 55.5 expected and 55.3 prior. It was coupled with a jump in the prices paid component. The dollar climbed at first but the survey chairman downplayed the strength, saying respondents were expecting work due to the storms. In addition, the rise in the prices paid component was driven by the climb in fuel prices around the time of the storm.

It was a similar story a day earlier when US auto sales climbed by the most since 2005. The US dollar hardly made any headway on two of the best headlines in months. Part of the reason might be that ADP employment fell to 135K from 228K in August but that was bang-on expectations.

Chances are, the market is right. That the hurricanes will skew economic data but that the trend hasn't changed. Still, the alternative is worth considering. What if the economy has turned a corner, wages are starting to pick up and a big tax cut is coming?

The USD upside would be substantial, especially against the yen because Japanese rates are pinned to the floor. Part of the reason for the dollar sluggishness has to be the Fed and the expectation that Trump will appoint a dove. If that's unfounded then there is a real possibility of three or more rate hikes in the year ahead. If so, USD/JPY could easily rally 10 cents from here and perhaps much more.

The odds of a tax cut are tough to evaluate but Warren Buffett said Tuesday he thinks it's higher than most believe. What if it comes at the same time as the economy is already heating up?

That will be a question to consider in the weeks ahead but in the hours ahead, the focus will be on the Australian dollar. It bounced Wednesday after two weeks of struggles but the next chapter will be written by data. The August trade balance and retail sales reports are due at 0030 GMT. The consensus is for a surplus of $850m and sales up 0.3%.

Act Exp Prev GMT
Retail Sales (m/m)
0.3% 0.0% Oct 05 0:30
ADP Employment Change
135K 131K 228K Oct 04 12:15

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