The strong growth in U.S. retail sales and the surge in consumer prices were expected to continue pushing the U.S. dollar higher on Thursday, but what happened was exactly the opposite, leaving many traders questioning the greenback’s uptrend.
The past 24 hours were very interesting in currency markets, not just on the data front, but even comments from Fed officials who echoed Yellen’s hawkishness. Philadelphia Fed President Patrick Harker, suggested that the economy needs three rate hikes in 2017 without even factoring in President Trump’s fiscal agenda, meanwhile Boston Fed President was more hawkish, saying that the Fed may raise rates by more than the central bank has forecasted.
The only explanation for the dollar to retreat against most of its major peers is that yield spreads failed to expand further. For example, the U.S. – German 10-year yield spread dropped today by 2 basis points to 210 and dropped by almost 3 basis points against the Japanese 10-year yields.
I believe that the slight tick higher in bond prices will be temporary, unless a correction in U.S. equities is due after several days of posting new highs. Very few experts may disagree that valuations are overstretched, and that investors are willing to pay more premium on prospects of aggressive fiscal plans. We can even go further to discuss that bubbles are being formed, and Professor Robert Shiller’s CAPE PE ratio supports this opinion as it approaches 29. However, bubbles may grow bigger, even much bigger before they burst, if animal spirits continue to drive the rally.
For this reason, I think the dollar may remain a buy on the dip, until there is evidence of U.S. equities retreating.
Today’s U.S. data which includes weekly jobless claims, housing starts, building permits and Philadelphia’s Fed manufacturing index, are not likely to provide any significant impact on the U.S. dollar, so traders should keep focused on performance of U.S. treasuries.