US Dollar Attempts Major Reversal as Taper, Risk Debate Heats Up

Fundamental Forecast for US Dollar: Bullish

• The Taper timeline is shifting from a March 2014 forecast to either the January or December meeting

• An ECB rate cut puts another major central bank on the easing path which indirectly bolsters the dollar

• The dollar’s path depends heavily on a December vs March Taper? Trade the US Dollar’s via our Mirror Trader currency basket

The dollar finished the week higher against nearly all of its major counterparts with particularly impressive performances from EURUSD and USDJPY. While some of this bullish drive can be attributed to cross winds, the greenback generated its own heat by tapping into both QE expectations and risk trends. This week, we will see whether the persistently rising tide of volatility can finally ignite the critical, underlying fundamental themes and produce the heavy trends of years past.

Given the key event risk this past week, the most promising catalyst moving forward for the dollar – and broader financial market – is renewed speculation over the timing of the FOMC’s Taper schedule. A month ago, the central bank curbed fear that the stimulus backstop on risk-taking would soon be trimmed when it defied expectations and deferred the Taper (a reduction in its $85 billion-per-month QE3 program) at the September 18 meeting. With the US government shutdown shaving off an estimated 0.6 percentage points off 4Q GDP and delaying key data, a multi-meeting postponement of the moral hazard withdrawal seemed clear. Working with an economist survey from Bloomberg, it was expected that the reduction in support wouldn’t occur until at least the March 18, 2014 meeting. Yet, optimism in external support (QE) has cooled significantly over the past few weeks…and the dollar is positioned to take advantage.

In the statement from the Fed’s October policy meeting, the central bank notably resisted expectations for a move dovish tone to accommodate the recent fiscal troubles. Quite the contrary, the group noted further economic improvement and dropped their mention of concerns from fiscal sources. This past week, we were given data that further erodes the ‘QE-forever’ mentality. The better-than-expected 2.8 percent 3Q GDP reading was a backdrop improvement but skeptics could reason it is a dated reading. Less controvertible was the October NFPs which bested expectations despite the federal furlough through the period. The 204,000 jobs added to the payrolls beat, though the unemployment rate did tick higher to 7.3 percent. There is plenty of debate over whether this data is ‘accurate’, but the Fed’s statement suggests they would view it as supportive.