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Will the US dollar resume its uptrend in 2017 after two years of sideways trading?

A note from Morgan Stanley FX research mentions that we are in a similar situation than last year, with the Fed likely to hike in December, only with one big difference: last year the market was pricing an additional hikes of 65 bp for 2016, whereas today it is only pricing a further 18 bp for 2017.

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In other words, the greenback is conservatively priced and it leaves room for upside surprise in 2017.

According to Bloomberg the probability of a hike at the December Fed meeting is at 67.6%. I think it’s closer to 80%, considering the oil price rebound above $50 (and potentially higher, see chart below), and a Clinton win is almost warranted two weeks from election day. Higher oil prices may raise inflation expectations, hence incite the Fed to hike. Similarly a Clinton victory represent “business as usual” (unless democrats win the house..highly unlikely), and the fed will have no reason to delay.

Few stats about US elections:

  • Polls show Clinton ahead > 80% (including online anonymous polls).
  • Larry Sabato’s Crystal Ball (98% accuracy) is showing Clinton as a clear winner.
  • 30% minorities, 70% whites. Trump needs to gather a proportion of white supporters never reached before to compensate the loss in minorities.
  • 8 times out 9, when the outgoing president had an approval rate > 48%, the same party remained in power. Obama is > 50%.  

On the weekly chart, the dollar index (DXY) broke out of the upper line of the triangle on strong momentum and should head towards the top of its 2 year range at 100 (equivalent to a EURUSD at 1.05). The mid-price between the past 52 week high/low (Ichimoku cloud) at 96.30 should act as major support (equivalent to a EURUSD at 1.1120). 

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