Are the fears of investors who are selling dollar justified?
Markets are just like humans: if they believe in anything, they are looking for any evidence of their ideas and ignore everything that contradicts. The speculators, having entered the dollar longs, think the USD rally to be too long; therefore they think it is time to take the profit due the signs of the US economy’s recession, the Fed’s monetary normalization, and the improved trade relations between Washington and Beijing.
It doesn’t matter that Jerome Powell announced the US economy to be in a perfect state and the US employment data in October to be rather strong. The Fed’s chair also noted that the wages were not growing as fast as he would like. Quite a strange remark, based on the fact that the indicator is up to 3.1% Y-o-Y, which is the best result since 2009. If the central bank is not satisfied with the wages growth pace, then it doesn’t expect the inflation rate increase, and so, it is going to slow down normalizing its monetary policy. Isn’t it a reason to sell the dollar?
The same is true for the retail sales. Nobody cares that the indicator has been up in October higher than it had been expected. The data for the August-September period have been revised and entered the red zone. Doesn't to suggest that the second estimate of the GDP in the third quarter should be worse than the previous one? The US economy may not be as strong as it seems. The situation is fueled by the survey of Wall Street Journal 58 experts. Over a half of them believe that the USA is going to face economic recession in 2020; and 70% of respondents are confident that the US economic expansion won’t be meeting the expectations during the next 12 months. 46% of economists suggest the Democrats’ victory in the House of Representatives will increase economic uncertainty.
Dynamics of U.S. retail sales
Source: Trading Economics
It is also ironic that the markets are confident in the soon end of US-China trade war after the meeting of Donald Trump and Xi Jinping in Buenos Aires. Despite the tariffs introduced, theU.S.-China trade deficit has expanded up to $106 billion, compared to $92.2 billion for the same period last year. The measures, taken by the White House, are not efficient; and the issue is too complex to settle it down during a single talk. At best, they may enter a framework agreement, and the USA won’t boost the import tariffs to 25%, from the current 10%, in January, 2019. Nevertheless, the stock indexes are rising, followed by the emerging markets’ currencies, which are strengthening and thus putting a pressure on the US dollar.
Dynamics of Shanghai Composite and USD
Source: Trading Economics
I haven’t even mentioned the political risks in Europe. Everybody seems to forget about Italy; they are eager to buy the euro on the positive around Brexit, completely ignoring any negative. At first, the market seems to be irrational. In fact, it gives out desirable for valid. I only wonder when it is up to regain the consciousness. I believe it should happen soon. Therefore, it is still relevant to sell the EURUSD while it’s rising towards 1.1355, 1.1445 and 1.1515.
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Price chart of EURUSD in real time mode
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