US dollar had a mixed start to 2017. Although the US macroeconomic situation remains solid and there’s still a high probability of expansionary fiscal policy in the future, a so called "Trump Trade" that saw the US dollar as one of the winners has seen a serious reconsideration as president Trump is yet to take any steps in areas of interest for the markets (tax code, infrastructure spending etc.) and has prioritized controversial measures that may increase market uncertainty. Make no mistake, Trump’s policies will remain at the top of market agenda for months to come but events like the Fed’s decision and the NFP report may affect the US dollar as well. We present our take on them and propose 2 trading approaches.
Fed’s statement (Wednesday, 7pm GMT) - the FOMC was a major market mover in December when it increased interest rates but also pointed at a possibility of 3 interest rate hikes in 2017. Markets quickly adjusted valuations but a lack of details regarding policies of Trump’s administration brought uncertainty in this area and markets scaled back their hike expectations to 2 for this year. This seems to be crucial because we do not think the Fed has a basis to change its rhetoric or dismiss a possibility of a hike in March. A solid statement could turn out to be USD supportive.
Investors have already scaled back their bets on Fed’s ’17 rate hikes to 2. Source: Bloomberg
The NFP report (Friday, 1:30PM GMT) - the labour market continues to be at the center of the Fed’s attention. The market expects employment gains to accelerate a bit to 171k but with employment rate already down to 4,7% the focus is on wage dynamics. We have seen an acceleration in hourly wages but it needs to be continued for the Fed to keep increasing interest rates. Annual wage increase is expected to decelerate to 2,8% after it unexpectedly surged to 2,9% in December, a 3%+ number could therefore be supportive for the US dollar.
Wage growth will be crucial in the NFP report. Source: Macrobond, XTB Research
2 trading strategies
USDNOK - the sentiment is against the US dollar but then again investors turned from being overly optimistic to being cautious when it comes to the US currency. Therefore, should either the Fed or the NFP surprise positively, we could see a renewed interest in the US dollar. We can see that USDNOK is in a multi-year consolidation and it is testing an intra-range level (ca. 8.30). Therefore this zone could work as a support in the USD-positive scenario and the pair could climb back towards 8.60-8.70. The pair looks interesting given the fact that oil seems to be overbought (judged by record high speculative positioning). Lower oil prices could be USDNOK positive.
NOK benefited from higher oil prices and USD correction. Could 8.30 be a turning point? Source: xStation5
USDJPY - should both the Fed/NFP turn out to be broadly neutral, we could see extension of the USD correction because market sentiment remains unfavourable. However, the USDJPY is driven by US long-term yields and it’s possible that yields could climb again at some point. Meanwhile a 111.34 is a very strong support which could potentially be a turning point for the pair.
UJ has been declining lately but 111.34 is the key support. Source: xStation5
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