Morning Commentary: King Dollar

Foreign Exchange - Morning Commentary
King Dollar
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Since our last commentary on Wednesday, there has been little in the way of major market-moving economic data or news. The news that has come out has generally had a muted impact due to the holidays, end of the month, and general lethargic nature of the markets as fatigue from the trade talks set in. But one interesting development that has gone largely unnoticed is the slow but steady rise of the U.S. dollar (DXY) over the past two weeks; the DXY index is up modestly in eight of the past nine sessions.

The U.S. dollar (DXY) is up nearly 2.5% on the year and this is despite large and substantial downward movements in U.S. interest rates beginning in Q4 2018, three Fed rate cuts this year, a slowing of the overall economy, weaker job growth creation and other key indices reflecting slower overall global growth that has finally impacted our economy.

Market psychology generally supports the notion that the U.S. economy is in a better position to withstand a global slowdown than others, and the DXY reflects this confidence and optimism. How long this can continue will remain to be seen as we enter 2020 with large trade deficits, continuous budget deficits, a rising national debt, and uncertainty from another election year cycle. In the short term, price action and market psychology will keep the DXY reflecting this positive sentiment, but as we have all experienced, markets and psychology can turn quickly.
  • Japanese industrial production for October came in much worse than forecast at -4.2% against expectations of a -2.0% print. YoY data showed a sharper decline than consensus estimates at -7.4%. Japanese housing starts also came in weaker than forecast; the Japanese yen has been steadily weakening since September and is at its lowest level today since May 31.
  • Germany has seen some positive economic news overnight and over the past two weeks. German unemployment unexpectedly dropped by 16,000 against estimates of a gain of 6,000. The UR held at 5.0% near a record low. This is good news and combined with a rebound in factory orders and an improvement in business confidence is providing evidence of some green shoots after months and months of dismal economic data. It has been no help for the euro as it has fallen in six of the past eight sessions and is down fractionally on the session.
  • India posted its weakest GDP quarter in six years today as the economy only grew by 4.5% down from 5.0% in Q2. Core infrastructure industrial output declined by 5.8% in October which is the biggest contraction since 2005. The third largest Asian economy has been slowing all year long due to weak export demand, businesses holding back on investment, and weaker consumer spending. The Indian rupee is weaker on the session as the market anticipates the fourth interest rate cut this year by the Indian central bank next week.
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