What’s Happening?

The US Dollar Index has been soaring since the start of this month, accelerating upward on speculation that a Trump administration could boost inflation and put pressure on the Fed to raise interest rates more quickly. Technically, however, signs are appearing which suggest the rally may be getting overdone. As we saw with copper last Friday, an overextended market can become increasingly vulnerable to shocks and reversals. There are a ton of Fed speakers lined up this week who could impact USD trading.

Technicals:

The Dollar index (DXY) has been under accelerating accumulation for the last six weeks advancing from near 95.00 in late September to 100.00 this week. For much of the last month, the index has been consolidating between 97.00 and 99.00 breaking out to the upside Monday.

DXY, however, appears to be approaching a zone where it could encounter resistance between the 100.00 round number and 101.00 a measured move from the recent trading range. This area contains the 100.55 level where the Dollar Index peaked before the December 2015 interest rate increase.

The big move upward has pushed the RSI up above 70 and into overbought territory once again. Meanwhile, the higher high in the index has not been confirmed by the RSI. Combined, momentum indications suggest that upward momentum for the USD Index may be peaking and vulnerable to a correction. Overbought conditions for the USD have also developed relative to gold, JPY, EUR, MXN and CAD indicating a USD correction could have a big impact on trading across a number of currency markets.

Fundamentals

For the last year, I have been using the following rule of thumb for the number of interest rate hikes the street is expecting over the next 12 months as follows:

100.00             Four

97.50               Three

95.00               Two

92.50               One

90.00               Zero

The trading near 95.00 earlier this fall suggested traders were expect the Fed to pick up its pace of increases from one per year to two. Recent trading suggests traders expect the Fed to potentially act more aggressively.

Recent comments from Fed speakers indicate the central bank is on track to raise interest rates in December for the first time in a year. Even super-dove Bullard of the St. Louis

Fed thinks we could see a December increase. Fed funds are currently pricing a 92% chance of a December hike up from about a 60% increase at the start of November. The market is also pricing in a 37% chance of an additional hike by June 2017 and a 9% chance of two more hikes by then.

Since the election, the narrative has grown that Donald Trump may ramp up infrastructure spending boosting inflation and shifting some of the heavy lifting on stimulus from the Fed back to the government (monetary to fiscal policy). This would also free up the Fed to move more quickly on normalizing interest rates.  

The big question now is whether markets have moved up too quickly. Before the Decenmber 2015 rate hike, the US Dollar Index peeked up above 100.00 but then tumbled after the hike was done. Could we see a repeat of the advance on speculation, retreat on realization trading?

There are a ton of Fed speakers who could give an indication of which way the Fed is thinking, particularly on Thursday when Fed Chair Yellen and Governor Lael Brainard are both speaking. While neither Democrat is expected to quit, it will be interesting to see if Brainard, the leading dove at the Fed, changes her tune or not. Tuesday also features several voters this year speaking including Vice Chair Fischer. Fed governors who rarely speak are also out this week including Tarullo on Tuesday and Powell on Friday. 

Comments from Fed members could spark action in USD trading.

Fed Speakers this week include:

Monday           Kaplan, Lacker, Williams

Tuesday           Rosengren, Tarullo, Fischer, Kaplan

Wednesday     Bullard, Kashkari, Harker

Thursday         Dudley, Yellen, Brainard

Friday              Bullard, George, Dudley, Kaplan, Powell

Permanent voters and 2016 regional voters are in bold

2017 regional voters are in italics. Their comments may be viewed as increasingly important as they will have a say on follow-on increases next year