The Indestructible Dollar: A Quiet Start to the Week in FX Markets

FX Daily: The indestructible dollar

Today's US Labor Day holiday means that it has been a quiet start to the week in the world of FX. The dollar remains near its highs despite Friday's US NFP jobs report showing a jobs market moving better into balance and wages softening. That probably owes to poor growth prospects overseas. Second-tier US data releases look unlikely to hit the dollar too hard.

 

USD: Little reason to offload dollar positions

The dollar has had a good couple of months. It has been buoyed by domestic strength in the US economy and souring sentiment in key trading partners such as Europe and China. The source of that strong domestic demand in the US has been a tight labour market, which has powered consumption. Despite US wage growth softening in August and the unemployment rate finally climbing, US Treasury yields actually rose on Friday and the dollar strengthened. Driving that move may have been the rise in the participation rate with people returning to the workforce. This suggests that the narrative may have moved on from the disinflation debate towards the extension of employment, consumption and domestic demand. 

This week's US data calendar looks unlikely to open a decisive new chapter in this narrative – although in the past, the release of the ISM services index (remember that sub-50 reading at the start of the year?) has moved markets. That index is released on Wednesday. There are a few Federal Reserve speakers this week, but market expectations that Fed rates have peaked look set, as do views of a modest 100bp of Fed easing next year (we look for 200bp+). We see little to challenge a strong dollar this week and could see DXY edging up to the 104.50/70 area. 

Elsewhere in the world, the central bank policy focus is on the likes of Australia, Canada, Poland, Chile, and Israel. No change is expected in most, although Poland should be starting its easing cycle this week, and Chile is expected to follow up its 100bp cut in July with another large rate cut.