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Money and Markets: Investing Insights

Dollar Breakout?

Boris Schlossberg | Tuesday, March 7, 2017 at 4:00 pm

Boris Schlossberg

Why has the dollar been so weak?

That’s been one of the markets’ bigger mysteries over the past several weeks.

After all, U.S. economic data has been nothing short of exemplary.

Fed officials have been almost uniformly hawkish, led by Chairman Janet Yellen, who really stepped out of character over the past several weeks to practically telegraph to the market that the Fed is on course for three rather than two rate hikes this year.

Expectations for a Fed hike in March have ratcheted up considerably, with Fed Funds Futures now assigning a more than 50% chance of an increase.

Still, the dollar has refused to respond. The buck has been mired in a downward range against the yen, with USD/JPY failing at the 115.00 level multiple times. Meanwhile, even the euro has found support at 1.0500 despite myriad political problems in the region.

So, what’s the issue? Why is the dollar so weak? The conventional wisdom has been profit taking. Most analysts are convinced that the market is simply “selling the fact” now that the Fed policy is relatively clear.

Perhaps. Profit taking is certainly part of it. But the explanation seems too pat given that only a few weeks ago, the market was assigning just a 36% probability to a rate hike.

The American economy has been getting stronger. So why won't the wimpy dollar bulk up?
The American economy has been getting stronger. So why won’t the wimpy dollar bulk up?

For a long time, I have argued that even though equities have blindly marched higher, fixed-income markets and currency markets have been far more skeptical of the rosy scenario.

One key worry for bond and FX traders has been the divergence between business sentiment and consumer sentiment since the election of President Trump. Business sentiment has soared on the hopes of lower taxes and looser regulations. Consumer optimism has been far more tempered.

However, it’s unclear how much business spending will increase over the next 12 to 18 months. For while capital spending is an important part of the economy, the lag times are very long.

In contrast, consumer demand is immediate and highly stimulatory to the economy – which is why wage growth remains the single most important economic data point to the dollar.

This week, the market will get the Nonfarm Payroll (NFP) numbers. And of course, another print of 200K jobs would be a nice boost for the economy.

But FX traders are most interested in the average hourly earnings reports, which are projected to increase by 0.3% from 0.1% the month prior. If the data proves to be in line, or even better, if it beats the mark, the greenback could get its mojo back as the currency market’s concerns about consumer demand quickly evaporate.

There are already signs that the market may be positioning for a new leg in the dollar rally. The greenback perked up in overnight trading, rising to 114.00 against the yen and gaining on all its major trading partners. If the NFPs deliver, the perplexing dollar stall may be finally over and the buck could make another breakout move.

Happy Trading,

Boris Schlossberg

 

Boris Schlossberg is a weekly contributor to CNBC’s Squawk Box and a regular commentator for CNBC Asia and CNBC Europe. His daily currency research is quoted by Reuters, Dow Jones, Bloomberg and Agence France Presse newswires and appears in numerous business publications and newspapers worldwide. Mr. Schlossberg has written articles on trading for SFO magazine, Active Trader and Technical Analysis of Stocks and Commodities. He is the author of Technical Analysis of the Currency Market and Millionaire Traders: How Everyday People Beat Wall Street at its Own Game, both of which are published by Wiley. Boris’ extensive experience in trading and developing momentum-based techniques provide the foundation for BKForex’s strategies.

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