Tuesday, February 7, 2017

Is Trump US Dollar Crazy or Cagey

We’ve no axe to grind with respect to expectations for near-term movement in the US Dollar Index (DXY).  I had, as many have, a belief that the dollar would trade strongly in general this year.  At the same time, in late December, as DXY was just breaking below 103, we suggested 98 was a good target (report).  I’d be willing to amend that assessment, but suspect that pressure will return to the dollar value and DXY will trade to 98 before 103.  We remain watchful for confirmation or evidence against this and earlier notions. 

Last week as the dollar continued to trade poorly, moving more than 4.4% from the early-January high, I thought out loud bouncing a notion off a few broker friends and traders.  I wondered aloud if President Trump could be cagey enough to willfully and knowingly, negatively impact the US Dollar foreign exchange value by maintaining a loose-cannon approach toward an America First policy agenda communications. 

Clearly the policy positions, the avenues by which they have been communicated and in some cases implemented, have had a negative impact on the dollar.  At the same time, absent a strong backlash of retaliatory reprisal trade initiatives instituted by other nations, much of the world sees Trump’s proposed policies as US dollar friendly.  Without the wild, seeming off-the-cuff and in your face policy communication, the US dollar might have otherwise been quite a bit stronger and thus a headwind to proposed policy intent. 

At any rate, I never want to accuse a politician of being too clever, but even without intent, the combination of strong dollar policy along with over-the-top, school yard bullying from the Presidential pulpit appears for now to be allowing for a stronger expected economic growth path less hindered by a stronger dollar currency. 

Philly Fed Harker commented about a rate hike being on the table for March combines with San Fran’s Williams similar appeal last week.  Together, these two are not enough to sway sentiment and as I had indicated in a post-FOMC statement missive from Feb 1, ‘…the Fed did not give wide notice that the door for a March FOMC rate response had been kicked open. It is of course a door that is not closed, but we might imagine that economic data will need talk louder in order to convince many that the Fed has enough by then to act.’  And so, the employment report and Trade Balance reports are friendly, but not particularly loud-speaking.  More confirmation from economic data appears needed to push the needle toward a probable March rate response.              

Below I show a hourly chart of the US Dollar Index (DXY) which has formed a potential bullish flag.  This formation has not been elected.  Should it be elected with a settle above the upper red downward sloping trend line, the objective of the formation would imply something like a move to 101.50.  


Should the Bull Flag get elected and DXY advances toward 101.50, some might consider that level as a spot from which to set US Dollar shorts for the continued move to 98, risking 103.  Otherwise a failure to elect the bull flag might catch some dollar bulls offside and result in weakness from nearby levels.   

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