Wage growth is seen accelerating in Dec’s jobs report, sell EUR/USD?
Over pessimism may imply that the dollar has been undervalued with entire market being bearish on it
It seemed that the market has reached the consensus that US dollar will continue to weaken, as suggested by both fundamental and technical signals. However, many historical cases show that “reality also goes against initial consensus”.
Before talking about the dollar, let’s look at some of the classic historical cases first.
1) Chinese yuan was expected to depreciated in 2017, but it appreciated against dollar by 6.7%
At the end of 2016, the demand for dollar surged in Mainland China when the USD/CNY exchange rate is close to 7. Against that backdrop, most of the market participants predicted the renminbi to devalue above 7 versus dollar in 2017, however the renminbi appreciated almost 7% against the U.S. dollar eventually and achieved its first yearly appreciation versus dollar since 2013. Given the Fed was still raising interest rates, yuan’s direction last year was really unpredictable. As you can see in the chart below, the forecast rates of RMB have been weakening than the moves in actual spot rates throughout the year.
Blue line: USD/CNY forecasts; Red line: USD/CNY spot rate
2) Most of the forecasters saw dollar index staying above 100 at beginning of 2017, but it slid 9.9% throughout the year
How many investors would have called for dollar to drop if they were told that Fed would hike 3 times accompanied by a balance sheet unwinding? Even analysts who accurately predicted that would have lost money as the dollar eventually fell by nearly 10%, one of the biggest drop since 2003. Such price reaction happened in the year when its economic momentum remained resilient, with the unemployment rate declining to 4.1% from the initial 4.7% and manufacturing PMI climbing to 58.2 from 54.5 at the end of 2016. Traders argued that fading “Trump trade” and flattening curves are the main reasons behind the dollar weakness, but a 10% drop throughout the year seems a bit overreacted.
3) After the Brexit in 2016, GBP/USD trend in 2017 is as solid as a rock
There was a significant sell-off in sterling after the Brexit occurred in 2016. After that, GBP/USD’s bias tends to move upside. Despite pound dropping sharply in September 2016, it was mostly driven by the surge in U.S. dollar. In 2017, sterling rose steadily and this is widely unexpected. After the Brexit, many analysts predicted that the economic downturn will accelerate, and the uncertainties in Brexit negotiations would only increase pound’s volatilities. However, GBP/USD rose 9.5% in 2017, setting the biggest gain since 2009.
Why does reality always go against the consensus? We summarized the two main reasons here:
1) When consensus has been reached, it meant that most of the factors have been priced-in, and the upside or downside is limited. The capital market is greedy and “big sharks” are always looking for the new investment opportunities with more profitable margin.
2) “Crowd trades” are easier to trigger stopped-order.
From the current dollar fundamentals, we have not found reasons to buy yet. However, too much pessimism may imply that the dollar has been undervalued with the entire market being bearish on the dollar.
Our Picks
EUR/USD – Slightly bearish
USD may rebound this week as wage growth beat estimates. This pair may drop towards 1.20.
USD/JPY – Slightly bullish
This pair may rise towards 113.60 if US CPI beats the estimates.
XAU/USD (Gold) – Slightly bearish
We expect price to fall towards 1310 this week.
Top News This Week (GMT+8 time zone)
Australia: Retail Sales m/m. Thursday 11th January, 8.30am.
We expect figures to come in at 0.5% (previous figure was 0.5%)
US: CPI y/y. Friday 12th January, 9.30pm.
We expect figures to come in at 2.1% (previous figure was 2.2%)
Fullerton Markets Research Team
Your Committed Trading Partner