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Chart of the Day: USDX

We’ve seen the USD close out the quarter on a firm footing, pushing to the highest levels since May 2017. On the quarter, the greenback closed higher against all major currencies except the Taiwan dollar (TWD), where USDTWD closed -0.1%. The most significant move came against the Brazilian Real (BRL), where USDBRL closed up 7.4%.

USDX daily

It doesn’t feel like the time to bet against the greenback, especially if we see a strong response in tonight’s US ISM manufacturing report. With expectations we see the index print at the 50.0 level, right on the expansion/contraction level. This consensus forecast has been lowered a touch after a poor showing from Chicago manufacturing (47.1), but if we do see better signs of expansion here, then the USD will likely start Q4 on a firmer footing and will be eyeing guidance from the raft of Fed speakers due this week. With the markets pricing a 39.8% chance of another 25bp rate cut from the Fed in the October FOMC meeting, if the Fed guide to a wait-and-see approach, it could strengthen the USD further.

That said, the argument has moved on somewhat to the Fed’s balance sheet and the likelihood of asset purchases, predominantly to keep the repo market in check. Whether there is causation and a direct link between the Fed having a bigger balance sheet, higher excess reserves and a weaker USD is the subject of increased debate. However, if the Fed is going to go down the road of ‘QE lite’ then it makes fascinating viewing for the USD, gold, and risk assets more broadly.

Watch price action around trend resistance (circled). Because while the fundamentals support further appreciation, a new quarter could herald new reasons to sell and the USD bears will want to see trend resistance contained as well as the rate of change.

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