Post-Hurricanes Buy Dollar Opportunity

October 16, 2017

| Fullerton Markets

Fed positive outlook could boost the dollar this week. Sell Gold?

Below-estimate US data could be purely due to bad weather, not driven by economic fundamentals

US dollar recovered from a sell-off against a basket of currencies after a lower-than-expected inflation report. After all, CPI data is above 2% for the first time since April. Together with Yellen’s speech on US economic outlook, US dollar could be an attractive asset now.

CPI last month grew 2.2% y/y, while some traders were expecting the report at 2.3%. The jump in September was due to soaring gasoline prices after Hurricanes Harvey and Irma caused production disruptions at Gulf Coast area oil refineries. Meanwhile, US retail sales rose 1.6%, less than the expected 1.7%.

Over the weekend, Fed Chair Janet Yellen painted a bright outlook for the US economy and inflation prospect in coming months. She said the impact of the recent hurricanes would likely slow economic growth slightly, but only temporarily. The economy should rebound by year-end. In other words, we think she was passing this message to the market: “The central bank is about to raise the interest rate for a third time this year, and the timing could be December.”

Based on recent high-frequency data, we think US economy has slowed slightly in the third quarter because of the hurricanes, but growth is likely to rebound in the current quarter.

World focusing on China congress meeting this week

China’s communist party congress kicks off this week. It is held once every five years. Without analysing the political changes, key things to watch will be clues about monetary policy, capital controls and state-owned enterprise reform. President Xi’s second term should be a continuation of the last five years, with state-owned enterprise (SOE) reforms and debt deleveraging topping the macro priorities. Cutting debt would be helpful for China equities. Any rhetoric emphasising SOE restructuring could spark speculative buying of groups in steel, electricity, chemicals and other sectors where mergers are expected. We think such outcome will benefit the Aussie in near term.

Our Picks

AUD/USD – Slightly bullish.

This pair may rise towards 0.7940, as investors react to potentially sound China economic data this week.