Once upon a dollar strength

The climbing dollar had been the trend of late and the latest surge overnight seems to suggest there is no stopping the rally. 

US flag
Source: Bloomberg

Nevertheless we would want to be cautious and drill down on how sustainable the drivers actually are.

Overnight, the dollar index gained approximately 500 pips and shot through the 100.00 mark. There had been only two such instances since 2003, both taking place last year. The brief breaks were short-lived as the index returned to fluctuate broadly between 92.00 to 98.00 thereafter.

The drivers for this rally lies with the high probability of an imminent Fed hike and the strong expectations for future hikes, driven by the potential shift towards fiscal stimulus from the incoming Trump administration. Future implied probability of a Fed hike for December has risen to 92.0% as of Monday, up from 84.0% in the session prior.

Although we have once again returned to this pivotal point, we could finally see a firmer dollar push through with fresh drivers this time round. While the fiscal stimulus remains an uncertain factor, the market had largely discounted this uncertainty owing to a full Republican congress that could accelerate some of the proposed spending and tax cut plans.

Asian currencies remain battered by this dollar rage. Notably, the weakness in JPY, onshore CNY and offshore CNH have been a boost to their respective equity markets. The Nikkei rose to a fresh 9-month high on Monday, ending the session up another 1.71%. Likewise CSI 300 was seen up 0.38% on Monday. The sustained dollar rally could see an extension to this trend into Tuesday.

Moving forward, the spotlight could shine on the contentious trade policy proposals that the President-elect had raised during his campaign trail and how emerging markets could be affected. Over the weekend, Asia’s giant and the subject of President-elect Donald Trump’s trade tariff, China, hinted at possible retaliation should the promised tariffs be passed through. The latest soundbite from outgoing President Barack Obama seems to suggest that the incoming President is “ultimately pragmatic” while Mr. Donald Trump’s personal 60 minutes interview offered little insights into his trade plans.

It is without a doubt that emerging Asian markets would be negatively impacted should a trade war break out between US and China, although the delayed address could mean that the President-elect may indeed be more pragmatic than we have known.

Separately, oil prices saw a slightly recovery in the overnight session. WTI futures rose from sub-$42.50/bbl to trade above $43.50/bbl when last checked (01:30GMT). News of Qatar, Algeria and Venezuela leading the push for the OPEC deal were music to the ears for oil traders, boosting crude oil prices.

Yesterday: S&P 500 -0.01%; DJIA +0.11%; DAX +0.24%; FTSE +0.34%

The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication.