USD End-2017: Inflation Still Missing

|
Includes: UDN, USDU, UUP
by: Max Loh

Summary

Final non-farm payrolls report for the year shows what has been confusing Fed officials for the longest time - inflation is still missing.

In 2018, the outlook for the USD will be affected by developments in Trump's infrastructure plan. Just this week, officials said details will be ready come January.

The dollar index is currently trading near very strong support levels of 92-93, with last week's price action particularly positive despite a somewhat disappointing jobs report.

US released non-farm payrolls jobs data on Friday, the final one for the year. Fittingly, in line with what we have seen all year round, wage growth remains stubbornly low, with average hourly earnings coming in at 2.5% YoY vs. 2.7% consensus. This was the only dampener in an otherwise robust jobs report, with a 221k non-farm payrolls reading crushing consensus of 195k.

With the Federal Reserve already admitting the labour market has been strong in terms of employment rate, the market's focus would have undeniably been trained on the average hourly earnings reading. Persistently low inflation in the economy has been a stickler for the Federal Reserve, and it has stated before it would want to see inflation growing sustainably before embarking on a more aggressive tightening policy.

That said, the Federal Reserve is almost dead-certain to hike rates in December, with almost the market pricing in almost 96% probability that it will take action.

Where then for the USD? With a December rate hike almost a dead ringer, investors should not buy the greenback going into the rate meeting next week. If history provides some insight, when the Fed last raised rates in June for the second time this year, the markets had similarly priced in close to 100% probability of the Federal Reserve taking action. After the decision was made, the USD actually sold off in "buy the rumour, sell the fact" fashion.

Not many surprises can be expected from the Federal Reserve. When it intends to raise rates, it typically prepares the markets way beforehand, leading to very unsurprising conclusions to its interest rate meetings. I would expect 2018 to carry on in similar vein. Volatility in the USD should most likely not result from Fedspeak or Federal Reserve meetings. Rather, the Trump administration would contain a higher degree of surprise factor.

Last week, Trump's administration provided some colour on infrastructure spending, one of Trump's pre-election promises. It was reported that details on this plan would be released come January, and the release of this piece of news actually gave the USD a boost. Trump's tax reform plan is closing in on some form of resolution, with the Senate and House looking to iron out details. Clarity on infrastructure spending would be a huge piece of USD-positive news, largely because this plan has been completely off the market's radar.

Looking at the weekly chart of the dollar index, the USD is trading near some very strong support levels around 92 to 93, with last week's price action particularly positive despite a somewhat disappointing jobs report as mentioned earlier. Going forward in 2018, the USD's outlook will largely depend on developments in Trump's infrastructure and tax reform plans. Should inflation levels start to rise finally, that would no doubt be another significant tailwind for the currency.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

About this article:

Expand
Author payment: Seeking Alpha pays for exclusive articles. Payment calculations are based on a combination of coverage area, popularity and quality.
Tagged: ,
Want to share your opinion on this article? Add a comment.
Disagree with this article? .
To report a factual error in this article, click here