USD: Post election premium to FV may ease – Scotiabank

The US Dollar (USD) is trading a little softer overall in quiet trade. Overnight news is relatively limited and the softer USD tone rather reflects the decline in US yields seen yesterday, a modest relief rally for the EUR and some JPY gains on the back of mixed/slightly hawkish comments from the BoJ’s Nakamura last night, Scotiabank’s Chief FX Strategist Shaun Osborne notes.

USD mixed to a little softer

“The policymaker, who resides on the more dovish side of the board, expressed some doubt about the sustainability of wage gains in Japan but also stated that he was not objecting to a rate hike. Pricing for the December 19th meeting picked up marginally again to reflect 9-10bps of expected tightening. Japan releases Labour Cash Earnings and Household spending data tonight.”

“Fed Chair Powell commented yesterday that the Fed was ‘not quite there’ on inflation and that policymakers can afford to be “cautious” as the Fed tries to find neutral. The comments prompted a very minor—and short-lived—rally in Dec FOMC swaps but had little impact on the USD. Markets continue to price 18-19bps of easing risk for this month’s Fed decision. Friday’s US NFP data may be more formative for market thinking on the rate outlook.”

“Technical trends in the DXY are ledging a little softer today. The charts show the DXY leaning a little harder on bull trend support (106.06) that has guided the market high through Q4 so far. Loss of support here may see the index run lower to test key short-term support at 105.35. The index has traded at a slightly larger premium to (spread-based) value since the election; estimated DXY equilibrium currently sits at 104.67. US data reports today include Trade and weekly claims. The Fed’s Barkin speaks on the outlook at 12.15ET.”