DOLLAR RALLY IS STALLING AS TREASURY YIELDS CONSOLIDATE

The dollar rally seems to be slowing in the past couple of days as the huge move higher in Treasury yields has just started to consolidate. This means that there could be a short period of respite at least, for the selling pressure on major forex currencies and gold. The Trade Weighted Dollar Index closed above 100 for the first time since December last year yesterday but the market is beginning to consolidate. This comes as the 2 year Treasury yield is settling down around 1.0% and the 10 year yield is settling around 2.2%. This settling is allowing support to form on the likes of gold (above $1211) and the euro (above the key support around $1.0710). It is possible that the profit-takers may look to move in if this consolidation continue. However, until there is more meat to the bones of what Trump’s proposals are, it is likely that the market will back this reflation trade that is supportive for the dollar. This comes as FOMC members continue to roll out with more hawkish language in the wake of the prospect of fiscal stimulus from President-elect Trump. Eric Rosengren suggests this would generate a tighter monetary policy with Daniel Tarullo said yesterday that a hike was more likely now.

THE DOLLAR REMAINS STRONG AS TREASURY YIELDS JUMP AGAIN

The move higher on the dollar has continued today as the markets continue to price for higher US growth and inflation of a Trump presidency. The strong dollar has been exacerbated by the early jump in Treasury yields (the bond market was shut Friday for Veteran’s Day), with the 10 year yield now over 2.2% and the highest since January. Also the highest since January is the Trade Weighted US dollar which is again close to 100. These moves are impacting across major forex pairs with EUR/USD back to Q1 levels and Dollar/Yen moving above a the key technical resistance at 107.47. The stronger dollar is also pulling gold back below the key October support and the bears will now be eyeing the $1200 level once more. Economic data out of Asia has been mixed this morning, with Japanese GDP better than expected at an annualised +2.2%, but China Industrial Production (+6.1%) and Retail Sales (+10.0%) both missed expectations.

MARKETS LOOKING MORE CAUTIOUS AS VOLATILITY BEGINS TO SUBSIDE

A slight air of caution is beginning to take hold now, with markets still trying to figure out the impact of a Trump presidency, and there are signs that volatility is beginning to subside now. After the initial wobbles, Wall Street had given Trump the thumbs up and pushed strongly higher. The prospect of tax cuts and potentially $1 trillion of fiscal stimulus would do that, whilst the changes to banking regulation is also deemed to be strong for the banks sector. The dollar has been on a tear since the middle of Wednesday morning, however there are a few early signs of this rally beginning to slow. The rally on Treasury yields though continues apace yesterday and if this begins to drop off then there could be some cause for some near term profit taking on these long dollar positions. The safe havens have been hit in the past couple of days but can the early moves today be anything more than a bear rally that delays further selling pressure?

VOLATILITY YET TO SETTLE WITH DOLLAR STRENGTH EBBING SLIGHTLY

The remarkable victory for Donald Trump in the US Presidential election resulted in an incredibly wild ride on financial markets that saw sharp swings first one way then the other. Initial pressure on risk appetite and the dollar turned around into the close, with an incredible rally in sentiment. The driver seems to have been the bond markets which took Trump’s acceptance speech as being a driver of both growth and inflation. This pulled a huge swing higher on the US 10 year Treasury yield and a significant steepening of the yield curve. Just 24 hours after Trump was announced as the President-elect, volatility is still yet to settle down. Will this initial assessment of reaction continue? Today there still seems to be an appetite for safe haven plays as the yen and gold have recovered some of the losses into the close. Furthermore, some of the dollar strength is just ebbing away again this morning and it will be interesting to see where the greenback ends up as the volatility subsides.

WHAT ARE THE MARKET LEVELS TO WATCH FOR THE PRESIDENTIAL ELECTION

As the US goes to the polls markets are consolidating. However this will certainly be the calm before the storm and overnight tonight we could get some significant swings with big volatility across forex and commodities. As the swing states are revealed early on Wednesday morning (UK time) we should get an indication of the victor. However that means volatility is likely to be significant early on, especially if Trump has a few strong early results. Ultimately with Hillary Clinton around 4% ahead in the polls and likely to win, a Clinton victory would be the least volatile outcome for markets. 

DOLLAR LOOKS TO STABILISE AHEAD OF NON-FARM PAYROLLS

After several days of dollar correction, the bulls are starting to build support again which is starting to unwind some of the recent safe haven flows ahead of Non-Farm Payrolls. The need to re-price for a Trump victory has sent market fear soaring in recent days with the VIX volatility closing yesterday at its highest level (at 22) since Brexit. However, whilst equity markets are feeling the concern, it is interesting to see Treasury yields begin to pick up slightly again and the US Trade Weighted Dollar also moving higher. This is helping the dollar to perform better across the forex majors and begin to unwind some of the safe haven flows away from the yen and gold. Today is Non-farm Payrolls and with the Fed still firmly on course for a rate hike in December it would need a drastically disappointing set of labor market data to alter market expectations. With expectation of another middle of the road report and the market more mindful of the impending election, it is possible that this could be one of the lower volatility Non-farm Payrolls Fridays we have seen for a while.

FEARFUL OF A TRUMP VICTORY THE DOLLAR REMAINS UNDER PRESSURE

Markets remain fearful of a Donald Trump victory and the dollar is under pressure. Safe haven assets such as US Treasuries, the Japanese yen and gold are rallying, whilst higher risk plays such as equities are being sold. Moreover though, the dollar is corrective and this is impacting across the forex majors, with even the embattled sterling managing to rally against the greenback. In the past week, the Trade Weighted Dollar Index has dropped from 99.0 to 97.1, which is almost 2.0%. Even the Fed has done little to support the dollar, in spite of there being little change to the expectations of a rate hike. The Federal Reserve quite predictably chose to hold off from increasing the Fed Funds rate, given the proximity to the Presidential election. The FOMC believes the “case for an increase in the federal funds rate has continued to strengthen” but has chosen to “wait for some further evidence of continued progress”. Whilst there was no explicit point towards a December hike, there is little to suggest it will not happen. According to the CME Group FedWatch tool, the probability of a December hike remains above 70%. For now the dollar is running on politics and not economics or fundamentals. Non-farm Payrolls may create some volatility tomorrow but it is Trump’s polling that seems to be key right now.