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USD Index at 13 year High on Inflation Outlook

Published November 18, 2016
  • Friday morning finds the US dollar index trading at its highest level in 13 years as it breaks above 101.00 for the first time since 2003
  • The index is weighted 58% against the euro, which has come under considerable pressure at the prospect of a massive wave of USD repatriation under Trump's planned corporate tax cut (to 15% from 35%)
  • Since Trump's victory, the trade weighed value of the USD has surged 3.8% on the expectation that his administration is likely to pursue large scale fiscal stimulus and/or protectionist policies, both of which are viewed as a boost to the inflation outlook which would lead to a higher policy rate path from the Fed
  • The Loonie's 2% fall since Trump's victory is small compared to the euro's 4% drop; however, the risks for USDCAD remain skewed to the upside
  • This morning could be a very volatile session for the Loonie as Canada reports CPI data for October at 830am ET 
  • The market is looking for prices to have risen 0.4% on monthly basis and 1.6% annualized
  • At 10am ET there are a cumulative USD $3B in options contracts expiring with a strike of 1.3500; this increases the potential for the spot rate to gravitate towards 1.35 at that time regardless of other developments
  • Yesterday, USDCAD pulled back all the way to its 21 DMA circa 1.34 before rocketing higher to an overnight high in the mid 1.3500's
  • This weekend, Canada and Mexico will meet to discuss NAFTA strategy in light of Trump's recent protectionist overtones
  • Canadian softwood lumber and beef have apparently already been discussed by his transition team as targets for increased tariffs
  • On the technical front, the USDCAD weekly chart continues to exhibit bullish undertones with short term moving averages diverging and trending higher, building momentum behind what could be a significant breakout for the US dollar

Charts: (1) USDCAD bias to the topside. (2) USD Index breaks out. (3) Secular USD bull markets typically last 9 years. (4) Economic Calendar.