USD: Temporary correction lower offers buying opportunity - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued to weaken in the Asian trading session with the dollar index extending its decline for the third consecutive day.

Key Quotes

“It represents the longest sustained sell off for the US dollar since the start of this month and follows the sharp adjustment higher both in the run up to and following the US election. There has been no fundamental trigger for the reversal of US dollar strength suggesting that it is most likely a temporary correction which is unlikely to derail the upward trend. The dollar index has recently broken above the rough consolidation range between the 95.00 and 100.00-levels which had held in place since early in 2015. A pullback towards the 100.00-level would present a buying opportunity in the near-term. We continue to believe that the likelihood of a significant loosening of US fiscal policy and tighter Fed policy under President Trump combined with stronger US growth will provide support for a stronger US dollar in the year ahead.”

“Economic data releases in the week ahead are expected to reveal that the US economy has expanded more solidly in the second half of this year and inflation pressures are picking up too. Economic growth in Q3 is expected to be revised modestly higher to an annualized rate of 3.0%. The latest personal spending report for October is expected to reveal that consumer spending has returned to more solid growth early in Q4 after growth moderated in Q3. Both the Atlanta Fed and New York Fed’s latest Nowcast models are signalling that the US economy remains on track to continue to expand more solidly in Q4 which are currently estimating growth of 3.6% and 2.5% respectively. The latest PCE deflator report is expected to reveal that disinflationary pressures from the sharp declines in the price of oil and stronger US dollar continue to fade lifting the headline rate back to its highest level since October 2014 and moving closer into line with the core rate.”

“The main economic data release will be the latest US employment report for November which will be scrutinized for further evidence that the US labour market has tightened further. The report is expected to reveal that employment growth remains solid although at a slower pace than over the last year and earnings growth is expected to remain at a faster rate closer to levels prior to the global finial crisis. Already tight labour market conditions are fuelling expectations that a significant loosening of fiscal policy will increase upside risks to inflation. The five-year breakeven inflation rate has reached its highest level since September 2014 at close to 1.75%. At the same time the five-year real yield has also adjusted higher moving back towards positive territory offering support for a stronger US dollar.”