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Fundamental Forecast for Dollar:Neutral
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Following a clear ambiguity over a December Fed hike, a range of central bankers are set to speak – including Janet Yellen
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October NFPs will represent top event risk, but payrolls and unemployment aren’t as important as the wage component
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The Dollar was once again offered the opportunity to make a run on 2015’s highs and move on to levels not seen since 2003. And once more it would fall short of the task. Thefundamental winds to the currency’s back are strong, but they are also well-encorporated. The relative fundamental appeal of the Greenback has carried EURUSD to 1.05, USDJPY to 126 and USDCNH to 6.60. An extension of this already-impressive run would require a serious escalation in conviction. But, what short of a realized Fed hike or financial plunge forcing investors to scramble for safety could measure up to the technical implications of a breakaway climb into 12-year highs? There is plenty on tap this week which will give it a go, but questions of scale will constantly plague bulls’ confidence.
Though this is a fundamental forecast, technical guidelines offer valuable contribution to the bigger picture. As with the S&P 500’s climb back towards the record highs set in May (currently around 2 percent away), the USDollar’s ambitions to overtake the 12-year high established in April represent a matter of conviction. Reaching such lofty levels is one thing. Breaking them and carrying forward is a different matter altogether. To extend the bull run, we have to ask whether there is enough untapped potential to further leverage the divergence in perceived value between the Dollar and its global counterparts. That can be a contrast dictated by the Dollar or its collective counterparts.
Looking out over the coming week – and admittedly beyond through year’s end – there remain two primary themes that we should inspect for market impact: relative monetary policy and risk trends. Seasonal studies suggest that the final two months of the year are prone to a drop in volume and climb in risk benchmarks like the S&P 500. What this boils down to is complacency leveraging the appeal of modest investment income – the raison d’etre of the past six year’s market bearings. Moral hazard is strong in the market, but the specter of a rebalance lingers. If risk aversion does kick in, the Dollar is ready to take advantage. In the meantime, we shouldn’t link the S&P 500’s dalliance with record highs to the traditional ‘bad currency’ view. Stable financial markets bolsters the probability of a Fed hike. Though, it should be said, that capital market performance is unlikely to motivate the hike; rather it will simply ‘allow’ it.