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Cup Day and the USD

Following a dip in the Australian unemployment rate in September and continued optimism surrounding the U.S.- China trade deal, the RBA’s decision on the cash rate this afternoon is expected to be a non-event. The official cash rate is expected to remain unchanged at 0.75% to give the RBA additional time to assess the impact of its previous three rate cuts.

This will allow traders to focus on Melbourne Cup office sweepstakes, backing a winner and a suitable venue to watch the race. For what it’s worth, I will be cheering on Surprise Baby and Finche. Aside from watching the race, it’s an opportunity for me to meet with market colleagues at one of Sydney’s oldest Chinese restaurants to catch up, discuss markets and exchange views.

A topic of conversation likely to be discussed is the overnight recovery in the U.S. dollar despite soft economic data. U.S. September factory orders fell -0.6% and the final reading on durable goods orders was also lower with the headline at -1.2% vs an initial print of -1.1%.

Ignoring the weaker data, U.S. interest rates moved sharply higher across the board, further reducing the chance of a December rate cut following last week's FOMC meeting and the upside surprise coming from last Friday's jobs report. U.S. 2-year yields closed at 1.59% up 4bp, while U.S. 10-year yields closed 7 bps higher at 1.78%. U.S. yield outperformance is likely to be one of the drivers behind the U.S. dollar recovery.

Up until last night the U.S. dollar index, the DXY has followed the road map nicely. In our last note, https://www.cityindex.com.au/market-analysis/the-us-dollar-frogger-and-the-fomc/ the expectation was for the DXY index to fall from 97.80/00 towards key support at 96.60/50 for a minor Wave v.

Following the overnight recovery, our suspicion is the DXY after making new lows at 97.11 last Friday completed a 5 wave decline from the 99.67 high and has now commenced a countertrend rally. A reasonable target for the countertrend rally is the 50% Fibonacci retracement at 98.39, after which I would expect to see U.S. dollar weakness resume.

Cup Day and the USD

Source Tradingview. The figures stated areas of the 5th of November 2019. Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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