Monday, December 23, 2019

Dollar looks set for gain as durable goods orders is likely to beat expectations

Tags
  • Dollar
  • US Durable Goods Orders

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Today's Analysis: Dollar looks set for gain as durable goods orders is likely to beat expectations

US Durable goods orders for November will be released at 9.30pm (GMT +8) today and economists are forecasting a 1.5% growth from October. The expected increase stems from a spike in aircraft orders for the month of November.

Boeing reported 63 orders in November, a jump from the 10 orders in October. Out of the 63 orders, 30 were 737 Max orders while the remaining were for its 787 models. As a result, the focus will be on ex-transportation and core capital goods orders instead. The end of General Motors' month-long strike in October is also likely to boost durable goods orders in November as well. In addition, the progress in US-China trade talks in November is also likely to push durable goods orders higher as well.

Recent US economic data signals that the US economic outlook is within the Fed’s expectations

Indicator Actual Consensus Prior
Nov NonFarm Payrolls 266,000 80,000 128,000
Nov CPI YoY 2.1% 2.0% 1.8%
Nov Unemployment Rate 3.5% 3.6% 3.6%
Nov Avg Hourly Earnings 3.1% 3.0% 3.0%

Dec U. of Mich Consumer Sentiment

99.3

97.0

96.8

Nov Housing Starts

1,365,000 1,345,000 1,314,000
Nov Industrial Production MoM 1.1% 0.9% -0.8%
Nov Core PCE 1.6% 1.5% 1.6%
*Source: Bloomberg

With the slew of upbeat economic data in the US, a better than expected durable goods orders would further signal to investors that the US economy is continuing to pick up. Implied probabilities for a Fed rate cut in 2020 has also diminished, with a Fed rate cut only probable after the Fed's September monetary policy meeting.

Futures implied probabilities signal that market sentiment for a rate cut in 2020 diminishing

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As durable goods orders in November is likely to beat expectations, investors will likely become more bullish on the US economy. Also, expect implied probabilities for a Fed rate cut to fall even more, which will drive the greenback up. As a result, expect the dollar index to rise, with the Dollar Index rising towards 97.89. But expect it to retreat slightly to 97.72's level as investors dissect the report, which will likely reveal that the driver of the dataset is from aircraft orders and GMs recovery from its month-long strike.

  Scenario Effect on DXY
1 Durable goods orders and core capital goods beats expectations Rise past 97.89
2 Durable goods orders beat expectations; mainly driven by aircraft orders Rise towards 97.89 before retreating towards 97.72
3 Durable goods orders meet expectations

Remain little changed

4 Durable goods orders fall short of expectations Fall to 97.42’s level
*Source: ADSS

Technical Analysis:         

DXY

The Dollar Index currently trades at the top end of the RSI indicator after the bulls pushed the index back above the medium-term uptrend support on Friday of roughly 97.53. But the RSI signals that DXY has room to fall. If today’s durable goods orders or new home sales disappoint, then the bears will take advantage and drag the greenback down against major currencies. As a result, expect DXY to fall towards 97.42 and possibly break that support level to range between 97.16 and 97.42. But if the bulls gain momentum, they will likely drive the Dollar Index up to 97.89 before retreating back to 97.72’s level as traders pull out from long positions thanks to the overbought signal from the RSI.

Support: 97.42 / 97.16 / 97.04

Resistance: 97.72 / 97.89 / 98.19

DXY Chart (H4)

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*Source: ADSS, TradingView