DXY rally to fizzle?
The above graph is line chart of Dollar Index (DXY) from 26th October 2016 till now.
DXY which seemed to be consolidating ahead of the elections did an about turn on markets post the Trump victory, confounding all market expectations. Investors were expecting a Clinton victory and a gradual run up of the Dollar as the December FED rate hike loomed closer. In fact on Trump victory, the chances of a FED rate hike actually fell back to 50%. What turned the tables was the sharp sell off in Treasury bonds which saw a hardening of yields with investors reckoning that the expansionary monetary policy (which would probably involve issuing more bonds) and similar fiscal policy would lead to inflation being stoked at least in the short to medium term. Chances of a rate hike rose back to 81% at the end of the last week and the Dollar continued to rally strongly in anticipation of these moves, breaching 100 briefly overnight, before settling slightly below that currently.
It would seem that the DXY has probably run up too quickly and would probably take a breather ahead of the December FED meeting. A spate of economic data due this week on retail sales, inventories, manufacturing, industrial production, housing and inflation could be triggers for the reversal. If data is steady and good, then the investors in the coming days will be forced to re examine their expectations on Trump policy. Trump has consistently been changing his mind on policy and despite what markets believe, could end up following a sensible middle path which will not rock the boat either on interest rates or inflation as expected. And last of all, the rally on Wall Street seems to be unsustainable with tech shares consistently taking a beating on Nasdaq, while healthcare and infrastructure sectors are basking in the light of a Trump victory. Any shake up on Wall Street could make FED nervous and could even postpone the expected FED rate hike, leading to a dollar sell off in the near term. An outside factor remains Oil prices which could fall further if OPEC is not able to establish any credible plan to cut or freeze production at its Nov 20 meeting. A dampening of oil prices will pull down inflation which could keep FED and Donald Trump comfortable without any interest rate hike in December.
Technically speaking, dollar index crossed major resistance of 100 levels yesterday. If index sustains above this level, it could rally towards next resistance of 102.50. Fail to sustain above this level, DXY could test major support of 98.00 levels. As of now, we would suggest our investors or traders to wait for a conclusive break on either side to take fresh positions.