For a full breakdown of the dollar to happen, we need to see a more stark deterioration in US activity and growth indicators which seems to be somewhat off. Other factors that could propel a dollar downturn could be a stronger recovery in Chinese or European economies or clearer Bank of Japan tightening move, both of which appear to be unlikely as of now.
This suggests there may be room for the dollar to sustain some momentum for now until clearer dollar bear trend starts later when the Fed pivots. FX ranges could remain narrow in the meantime.
Looking beyond the Fed – Carry trades and China’s stimulus
As volatility remains muted, dollar carry trade still remains interesting. The most favoured funding currencies have been Japanese yen, Chinese yuan and the Taiwanese dollar. Bank of Japan’s policy tweak has not changed that and any major shifts in policy remain unlikely before the next wage negotiation results. Traders may be wary of BOJ intervention while USDJPY stays above 145, but the patience levels of Japanese authorities have likely increased.
Also, a durable dollar downtrend is hard to imagine with what’s going on in China. Economic data continues to weaken and the central bank has come in with modest policy cuts this week to provide support. Calls for more stimulus continue to escalate, but any measures so far have had little impact on confidence and demand which continue to be weak. Weakness in the Chinese economy, as well as any further easing measures, mean yuan could remain under pressure until a Chinese recovery is more evident.
Technical analysis suggests dollar bears could remain cautious
The DXY index currently trades above 103, having recovered from the July lows of 99.58 and broken above the trendline resistance as show in the chart below. Key resistance ahead at 200DMA of 103.30, but if that is broken, there could be further upside to the 104 handle. There is also still room on the RSI for further upside, bringing caution to bears.