As financial markets continue to readjust expectations following the election of Donald Trump, the one big benefactor of the realignment has been the US dollar. Gains in the currency have largely proven self-fulfilling over the past week. One of the major drivers has been improving data which has added to the hawkish case for US interest rates. At present, the likelihood of December action from the Federal Reserve to raise rates is steady at 90.60%, matching Tuesday’s closing level. Although Trump has not necessarily improved visibility, with many market participants complaining about his impact during each occasion he speaks, the data remains supportive of such a move. Blockbuster retail figures from Tuesday combined with upcoming inflation data on both producer and consumer prices could see the near-term US dollar rally extended. However, the key to any lasting upward trend in the US currency lies in the language of the December FOMC statement.
While the US dollar has been climbing against a basket of currencies it trades against, one of the more pronounced reactions has been against the Chinese Yuan. Due to the soft peg implemented by the People’s Bank of China, any move to the upside in the US dollar drags the Yuan higher as well, decreasing China’s trade competitiveness globally. As a result, China has rapidly devalued the Yuan, leaving the offshore Yuan at the lowest point on record earlier in the trading session. The one problem with this strategy is that it is making dollar appreciation a self-fulfilling prophecy. Further moves to weaken the Yuan strengthen the dollar which requires additional intervention in the Yuan. Considering the US dollar broke out of a multi-year range to the highest levels since 2003 against a trade-weighted basket, the ongoing USDCNH acceleration is expected to endure over the near-term. As December rapidly approaches, the result will likely be mounting Yuan losses.
US Dollar Index Climbs to Highest Point in Over a Decade
Market Trends - 16/11/2016