By Vincent Cignarella, an FX strategist who writes for Bloomberg.
Trump Speech May Mark Turning Point for Dollar Trend
If Donald Trump’s speech Tuesday is long on hyperbole and short on details, it may be the end of the dollar’s reflation trade. Dollar-yen traders could be giving the clearest hint on the outcome.
The president’s speech will likely impact the Federal Reserve’s March decision and set the tone for the dollar for the next quarter. Despite the dollar’s slight gains during Monday’s trading, the trend since January is still down.
The president said on Monday his administration cannot do a tax plan without knowing health care costs and he also said he’d spend “big” on infrastructure. Dollar-yen fell after the comments, which may be a harbinger of what’s to come after the speech.
If stimulus plans are predicated on the cost of health care, it could be far off because legislation to amend or repeal Obamacare could prove long and arduous.
Trump’s speech could cement that timeline. If increased spending doesn’t occur until next year, it will give the FOMC more room to postpone until June.
A delay in fiscal stimulus and a patient Fed are two strong reasons to see the Trump reflation trade end because they would cause inflation expectations to slide, culminating in a lower dollar.
The best barometer of late for dollar direction has been the yen and the Ichimoku cloud strategy is suggesting the dollar rally is likely done. Short-term charts show the pair testing below cloud support for the first time since September with little support seen until 110.
Mean reversion analysis agrees. The dollar is trending lower below standard deviation resistance at 113.57 and appears preparing a test toward 108.38, the 12-month average closing price.
Long-term Elliott Wave analysis suggests a similar pattern. Dollar-yen is within its third wave, typically the longest and strongest, a break of the 111.60 intermediate wave support opens a way for a trade to as low as 100.00.