Consolidation or base building? – ENG

There is a fairly popular view that with 100bps of Fed tapering by the end of this year and a terminal rate already priced at 3.00%, the dollar doesn’t need to fall much further. Equally, however, we do not see the need for the dollar to rise too much. And for now we treat this week’s dollar price action as a downside consolidation after the relatively sharp 5% decline since early July, notes Chris Turner, FX strategist at ING.

The bearish dollar holding pattern continues

“What gives us some comfort that this is a broad decline in the USD is that the Asian currencies behind it – including the Korean won – are all participating in the move. Even the Korean options market is showing one-month risk reversal in favor of Korean won call options – something rarely seen since 2007. Whether this represents investors rebalancing underweight Asian portfolios or Asian exporters catching up on some late hedging in dollars remains to be seen.”

“As we discussed recently, we will likely need to get more negative surprises on US activity data to get the dollar bearish moving again. This may not be the case as the calendar only shows revisions to second quarter GDP data and weekly initial claims. The latter appears firmly stuck near the 235,000 area as large-scale job cuts are yet to occur.”

“However, they should rise at some point, and Chairman Powell’s speech last Friday sounded a little nervous about the speed at which the labor market was deteriorating. Expect the DXY to remain relatively limited and only a move above the 101.60/65 area would suggest we are seeing something more than a bearish consolidation.”