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FOMC stands on-hold on Wednesday meeting, as widely expected. There were no press-conference to follow the decision, only statement, which was slightly hawkish, indicating “solid” economic growth of the economy operating at a tight labour conditions. Nothing new. The December rate hike is almost priced in by the markets, odds are above 90% currently. Not much of the reaction in FX market. The price action leaves an impression like everything positive is already priced in and something extraordinary is needed to move the greenback higher. Three key events to play such a role this week: Trump’s decision about the next Fed Chairman (not Chairwoman we hope), House Republicans to release the tax bill, and NFP report.
The US Dollar Index, which measures a basket of six major currencies versus the greenback moved slightly higher yesterday (+0.2%), but this movement was before the Fed rate decision with not much of the reaction after the statement release. At the same time we observe traditional bullish trend in all US stock indices following strong earnings reports and sustainable demand for US treasuries. Our confidence in these markets is much higher than in ability of the greenback to continue the reversal pattern and turn into a strong bullish trend. The reason is related to the current difficult situation in “Trumpflation” as they call it.
First doubt is about the possible effect of the upcoming tax reform. Some analysts note that it would not have much of the impact for economy, slightly changing the situation for the middle class and not adding any pressure on extremely rich individuals in USA. But the Federal budget would face a problem, seeking additional $6 trillion over next 10 years. Add here the negative trade balance and huge external debt of the biggest economy worldwide. One of the fastest and most obvious ways to solve these problems would be to keep raising the interest rates, creating additional demand for the treasuries from both internal market and overseas. But there is no much inflation to have a traditional explanation of the tightening. The economy operates with historically low unemployment but wages and consumer spending to not grow. One more puzzle in this picture is the most probable candidate for the Fed Chair: Jerome Powell, Fed Governor, known as a dove (??).
The main economical event for the week is US October Non-Farm Payrolls report. We would not rather high expectations from the market: +314K according to Investing.com and +325K according to bloomberg.com. There could also be a revision of the September reading, which was negative (-33K). ADP report was strong this week, posting +235K. But this agency has a different methodology counting the payrolls, and it’s not always coming in line with the official report. So we expect the figure to be released most likely closer to the lower range of the expectations: somewhere around +200K.
The main economical event for the week is US October Non-Farm Payrolls report. We would not rather high expectations from the market: +314K according to Investing.com and +325K according to bloomberg.com. There could also be a revision of the September reading, which was negative (-33K). ADP report was strong this week, posting +235K. But this agency has a different methodology counting the payrolls, and it’s not always coming in line with the official report. So we expect the figure to be released most likely closer to the lower range of the expectations: somewhere around +200K.
We also think that the NFP report itself is not the main figure to watch tomorrow. Much more interesting will be the Average Hourly Earnings, which has direct impact to the consumer spending and, thus, inflation. We’ve seen the pickup in September (+0.5% MoM vs +0.2% expected and +2.9% YoY vs +2.7% expected). The odds for more rate hikes next year will definitely rise in case of the strong reading tomorrow. The market expectations are in the range of 0.0/0.5% and 2.7/3.1% respectively. We’ll cover the NFP report tomorrow in our live trading session. Must watch!
Technical picture of the USDX is mixed on the weekly chart. The rates went back to the horizontal channel, where the index traded in 2015 - 2016 after a short time break down in September 2017. We can see a pullback from the lows of this year, but we have doubts about a long-term reversal pattern to be completed. RSI14 is still bearish trading lower than 50% level. As long as the prices are lower than 50-weeks simple moving average, the downside long-term risks persist.
One more interesting asset to analyze in the scope of dollar index and US yields: GOLD. We’ve seen a strong bullish trend in August-September 2017, which was stopped by hawkish Yellen, driving the yields higher and limiting demand for safe-haven gold speculations. Gold futures have been bearish since September, 8th. But we see potential signs of bullish reversal recently. Daily chart below shows two failed tests of lower Bollinger Band with closing prices inside the range. Upside red line supports the rates from further decline. RSI14 indicates bullish divergence.
We would consider mid-term longs of the gold using a buy-and-hold strategy. Any possible disappointment in “Trumpflation” dilemma described above could lift the prices of gold much higher from current levels. Geopolitical tensions are also adding potential risks for a flight to safety. US President has a trip to Asia starting from Friday, and one of the main goals of this trip is to solve the North Korea situation. Who knows what is he going to tweet during this trip?
Nearest technical targets for longs of gold are 1303.10 (upper BB range) and 1317.10 (local high from September 26). We are ready to add more longs in worse-case scenario if the prices went lower, heading to long-term support level of 1250.00 dollars per ounce.
Another precision metal, which traditionally follows gold, is silver. It has much higher margin requirement, but pays-off with the higher volatility. Daily chart is much more bullish than gold with more room to go north. Yesterday price action was impressive, adding 525 pips of the profit in the first day of November trading statement. Next target is 17.489.
Let the profit be with us!
Please note, that this article comes from my archive. Check the actual date in the header.
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