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The U.S. dollar index (DXY), a weighted index of the value of the U.S. dollar relative to a basket of six major currencies, inched up 0.46% on Friday, to close at 99.58, after the Markit Flash U.S. Manufacturing Purchasing Managers' Index (PMI) for January came in at 52.7, beating the forecast of 51. The better-than-expected reading suggested that the manufacturing sentiment rebounded after hitting a 38-month low of 51.2 in December. A reading above 50 indicates expansion in the manufacturing sector.
The DXY has been struggling at technical resistances near the 100 level on Thursday, even after European Central Bank (ECB) President Mario Draghi signaled, at the press conference following their Governing Council meeting in Frankfurt, that the bank may provide more stimulus in March, citing the outlook for inflation had weakened “significantly.”
Despite a strong December jobs report and plunging crude oil prices, the dollar is going nowhere as a slew of disappointing U.S. economic data keeps piling up. The Commerce Department said that retail sales slipped 0.1% last month, following a rise of 0.4% in November. For all of 2015, retail sales rose 2.1%, the weakest reading since 2009, after climbing 3.9% in 2014, according to Reuters. The U.S. Federal Reserve said that industrial production dropped 0.4% in December, for the third straight month, after a downwardly revised 0.9% decline in November. Economists polled by Reuters had forecast industrial production for last month to decrease 0.2%.
Based on the weak December retail sales and industrial output, the Federal Reserve Bank of Atlanta trimmed its U.S. real GDP growth forecast for the fourth-quarter of 2015 to 0.6%. The forecast was 1.8% right after the Fed rate hike in mid-December. BNP Paribas turned sour on the U.S. economy, as the bank sees no U.S. GDP growth in the
fourth-quarter, citing the strong dollar has reduced overseas demand for U.S. manufactured products.
Dollar bulls, including Citigroup and BNP Paribas SA, were betting on the divergence in central bank policies, as the U.S. Federal Reserve expects the fed funds rate to rise to 1.375% by the end of 2016, meaning at least four more quarter-point rate hikes in 2016.
After weeks of turmoil in the financial and crude oil markets, the Fed's so-called "Dot Plot" is starting to look shaky, as the Federal Reserve Bank of San Francisco's Williams said last Friday that four rate hikes in 2016 are "not baked in the cake". St. Louis Fed President James Bullard turned less hawkish and said in his prepared remarks to the Economic Club of Memphis last Thursday that the latest plunge in crude prices has implications for monetary policy in the United States, according to CNBC.
As of January 19, there were 12,309 short positions of U.S. Dollar Index futures [DX], traded on the U.S. Intercontinental Exchange (ICE) in units of $1,000 x index value, by non-commercial or speculative, an increase of 1,804 contracts from the previous week, according to the Commitment of Traders (COT) data released by the Commodity Futures Trading Commission (CFTC). This is compared to about 55,084 long positions, an increase of 1,860 contracts during the same period. Hedge funds are piling onto the dollar trade and slightly increased their net long positions by 56 contracts.
Hedge fund manager George Soros told Bloomberg that he is betting against Asian currencies, citing that China’s economy is headed for a hard landing. Hedge funds are targeting the renminbi and the Hong Kong dollar, betting on an impending unpeg from the U.S. dollar. The trade could prove to be costly for Soros if he is shorting the yuan. Kenix Lai, a foreign-exchange analyst at Bank of East Asia Ltd. in Hong Kong, told Bloomberg on Thursday that even though China’s economy is going downhill, the Chinese authorities won’t let the yuan devalue sharply, as it uses its foreign-exchange reserves to stabilize the exchange rate.
The People’s Bank of China (PBoC) confirmed on Monday that the bank will start imposing reserve-requirement ratios (RRR) on the yuan deposited onshore by overseas financial institutions, effective on January 25, a move that may increase the cost of short-selling the currency.
Technically, in a short-term viewpoint, the DXY has been trading in a symmetrical triangle (SYM TRI) chart pattern since the beginning of 2015. The index is struggling to break out the trendline resistances of the symmetrical triangle pattern, at about the 100 level. The Federal Open Market Committee (FOMC) meeting is scheduled for January 26-27 and it could be a soul searching event for the Fed, according to a Credit Suisse report on Friday. If the DXY pulls back after the FOMC meeting, there are short-term supports near the 97 level, or the 100- and 200-day moving averages, and near the 94 level, or the trendline supports of the symmetrical triangles.
In a long-term viewpoint, the DXY has been moving in a bearish ascending broadening (ASC/B) wedge chart pattern with the top of the trading range at 102.16, or the 61.8% Fibonacci retracement level. A failure to break out of the ascending broadening wedge pattern could result in a sharp pullback of the index. |
