Tuesday, September 20, 2016

Dollar Index Still Looks Bullish

Last week we were impressed with the bullish rally in the U.S. Dollar Index (DXY) advancing more than a point from Monday’s low of 95.095 to Friday’s closing level 96.108.  The advance on Friday was the largest since August 26th.  The settlement on Friday also bested the previous high settle on August 30th and opened the door for an advance to test resistance at the July, 6 month high of 97.569. 

There has been no forward advance in DXY since Friday.  Instead, both today and yesterday found a session low at the downward sloping trend line that was bested on Friday.  This trend line is now acting as support and we are encouraged by the support provided. 

Finally, since the low of 94.465 on September 8th, there has been only 4 new session highs without a lengthy pause. This indicates the bullish advance unerway is not extended or stretched.  A new high today or tomorrow will extend that streak while the failure to do so would not be counted too strongly against bullish trend prospects. 

For those who like long odds, you might be interested in paying attention to the BOJ late tonight at their policy meeting.  As I had written some weeks ago (‘Treasury Yield Spike Not to Be Ignored’), it was the absence of easier policy intent by both the BOJ and ECB which led to the ‘buyers strike’ in Treasuries and which at the time seemed to have left the door open to a Fed policy response at this September FOMC meeting.  While we have little expectation at this point for a Fed response tomorrow, some might increase the chance for a Fed rate hike if the BOJ showed further indication that there was no further interest in providing additional monetary or monetary/fiscal policy support. 

A strengthened Yen (and EUR) brought on by less supportive BOJ and ECB could provide the Fed with some incentive to move forward with removing accommodation.  Even this is not expected be enough induce Fed officials into raising policy rates on Wednesday, but there could be some stronger response in Treasuries and other asset classes as adjustments are made for Fed policy expectations through the balance of the year.   

For more on the FOMC, see; ‘FOMC Report; Monetary Policy in the Awkward Middle

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