USD: Finishing the year on a firm note - BBH

Research Team at BBH notes that the US dollar is finishing the year on a firm note as it rose to a 10-month high against the yen before the weekend while the euro remains within spitting distance of the bottom of its two-year range near $1.05. 

Key Quotes

“Over the past month, dollar pullbacks have been generally shallow and brief.”

“This week's FOMC meeting is the last big event of the year.  The dollar may continue to be well supported ahead of the meeting where a rate hike is fully discounted.  The Fed officials may revise up growth and inflation forecasts, and still not take into account the extent of fiscal stimulus that may be delivered. The President-elect's team has indicated the initial economic focus will be on trade, not taxes or stimulus.”

“Nevertheless, investors anticipate both fiscal stimulus and a more hawkish configuration at the Federal Reserve.  At the same time, the ECB will be expanding its balance sheet by 780 bln euros next year, and the BOJ's extraordinary monetary policy is set to continue, augmented by modest fiscal stimulus.   Also, while many emerging-market central banks have been reducing their Treasury holdings to support their currencies, private sector demand has been strong, with European investor interest reported.  Americans appear to be liquidating some of their holdings for foreign bonds.  Foreign investors have returned to the Japanese equity market, but it appears to be mostly on a currency-hedged basis.” 

“We had anticipated the US Dollar Index to fall to 99.70 and possibly 99.00.   It recorded a low a little below 99.45 in the knee-jerk response to what appeared at ECB tapering.  It quickly rebounded, and before the weekend was testing a short-term down trendline drawn off the November 24, November 30, and December 5 high.  It was found near 101.55 before the weekend and 101.30 at the end of next week.   The speed of the Dollar Index 's recovery means that MACDs and Slow Stochastics have not crossed higher to generate new buy signals, though they may turn early next week.  Remember, the 101.80 area is the 61.8% retracement of the decline since from the 121.00 level seen in July 2001.”