The Dollar Outlook, Still Bullish

Strong NFP Points To Strong Economy

The Dollar Index set a new high last week and has since retreat. The retreat was sparked by profit-takers but driven, in the end, by an increased outlook for both recession and FOMC rate cuts. The reason is simple, Manufacturing and Services were both weaker than expected and point to 1) a recession in the U.S. manufacturing industry and 2) the need for stimulus. What I want to remind traders is the manufacturing economy is 1) only 10% of U.S. GDP and 2) been expanding at a moderate to robust pace for over three years. A little bit of contraction and consolidation within this sector is OK, necessary even, and nothing to worry about.

The stronger and by far larger portion of the economy is services and services, while slowing, is still expanding. Services PMI was positive and, more importantly, labor markets are still very healthy. Healthy labor markets mean healthy consumers and healthy consumers spend. The trade war can be blamed for the U.S. manufacturing slump but it can also be blamed on a shift in supply chains that is in turn helping to drive U.S. employment numbers. In a nutshell, U.S. NFP data shows average jobs gains running near 160,000 per month, the number of working people growing, the number of unemployed falling to a 50-year low, and wages showing solid increases YOY. No signs of recession, no need for stimulus, not for the labor market.

The CME’s Fedwatch Tool shows a 75% chance for a cut at the next meeting. I think this cut will come, if not this month then in December. What I don’t think will happen will be any more cuts this year or even next. PCE inflation has already begun to tick higher, another cut is going to be enough to get the re-focused economy moving again. Basically, if and I say if the FOMC cuts rates at this next meeting they will probably indicate it is the last cut for a while, that the “midcycle adjustment” is over.

The DXY has retreat but it is still in an uptrend. The index is sitting above the short-term moving average and already showing signs of support. Next week’s data will be important for the outlook as it includes the FOMC minutes and CPI/PPI. Because the labor market is healthy inflation data is all the FOMC has to go by. If inflation is ticking higher or hot there is no need for more cuts. A move up off the current levels would be bullish but face resistance at $99.50. The indicators are mostly bullish, MACD is falling and stochastic has formed a bearish cross, but this set up is consistent with a set up for a bullish trend-following entry signal.