After weakening over the holiday season, the US dollar is starting 2018 on a decidedly weak note. The currency is weaker against all major global peers, and especially the euro, emerging markets currencies and commodity currencies (such as the Australian dollar and the Canadian dollar). Falling US bond yields are unlikely to lend support to the currency anytime soon. Prior to the New Year, the US dollar was in short supply in interbank lending markets. After the European Central Bank and the Bank of Japan tapped the US Federal Reserve's USD swap line, the US dollar shortage eased as measured by cross-currency basis swaps. In recent history, the dollar shortage issue had a limited impact on the exchange rate. As we wrote before, we believe that issues in Eurodollar markets are unlikely to spill over during a strong global bull market. Following the currency's recent weakness over the holidays, we are downgrading the currency to bearish in both the short-term and the medium-term.
USD/JPY is mostly flat today and currently trading above 112.50. EUR/USD continues to climb higher and is trading above 1.20. The pound is also higher, and GBP/USD is currently above 1.35.
Looking at economic data this week, there are a fair number of employment-related data releases. Later today we'll see Markit manufacturing PMIs. On Wednesday we'll get ISM prices paid and manufacturing PMIs. We'll also see FOMC minutes from the previous meeting. On Thursday, we'll get ADP employment data, composite Markit and initial jobless claims. Friday is the key day, and we'll see non-farm payrolls as well as other employment related data. We'll also see the trade balance and ISM non-manufacturing PMIs. Before the holidays, November Core PCE figures met expectations (1.5%).
Following the holiday season sell-off, we are downgrading the US dollar to bearish. The currency is neither overbought nor oversold today, and trades within a normal range. This is based on technical indicators when looking at a weekly chart.