After four sessions of decline, the US dollar (DXY) rebounded on Wednesday following a round of strong economic data and a surge in oil prices. The dollar index, which measures the dollar against a basket of six major currencies was up about a half a percentage point at 101.50 heading into the North American close. In today’s trading, the dollar index is down 0.32%, trading near the 101.20 level.
Yesterday’s standout data releases included the November Chicago PMI index, which increased sharply to 57.6 from 50.6 the previous month. This was well above consensus expectations of an increase to 52.2 and the strongest reading since January 2015.
In addition, the payroll services provider ADP reported 216,000 new jobs were added in the private sector during the month of November, the strongest addition since June. The data was much higher than the downwardly revised 119k (revised from 147k) reported in October and also well above the 165k analysts were expecting, according to a Thomson Reuters survey. This sets a positive tone heading into the more significant November payroll report released by the Bureau of Labor Statistics at 8:30am ET on Friday.
As a result of the recent rebound, it appears a successful test of near term support at the November 22nd low has been established with Monday’s 100.65 low. The ability to hold this nearby support is a sign of underlying strength, particularly given the persistent heavily overbought condition.
Also supportive to dollar strength yesterday was the surge in oil prices. The contract for January delivery on the New York Mercantile Exchange gained more than 9%, as some of the world’s largest oil producers agreed to curb output for the first time since 2008, with the Organization of the Petroleum Exporting Countries agreeing to cut production to 32.5 million barrels per day.
Higher oil raises concerns of increasing inflation, which sent treasury yields higher. The higher yields sparked demand for the dollar relative to other currencies, as rates in the Eurozone and Japan remain ultra-low to negative.
Also in yesterday’s trading, Fed’s Mester said raising interest rates would be a prudent step and that postponing hikes for too long would raise risks of recession and financial instability.
Yesterday’s events, as well as a stronger-than-expected data earlier in the week, keeps the potential for an interest rate increase at the December FOMC high. At present, fed fund futures are pricing in a 96.3% probability of a rate hike at the December 13-14 meeting.
Overhead resistance for the dollar is at the recent high at 102.05, which represents a test of the next level at the 102.15 level, defining the minor corrective top established in March 2003. The next level of resistance is at the 103.50 level, which represents a corrective bottom established in July 2002. On a longer term basis, the target for the dollar is at the 108-109 area. This target is derived from the recent breakout from a multi-month consolidation phase, as can be seen on the monthly chart.
On the downside, first support is at the November 22nd low at 100.65, which was reinforced by Monday’s 100.64 for a low and subsequent bounce. Continuing to hold this level would keep the near term bias in the dollar firmly to the upside.
Today in the US, initial jobless claims are on the calendar, as is construction spending and the ISM manufacturing survey. October construction spending is projected to come in showing an increase of 0.6% following a decline of -0.4% in September. Regarding the ISM Index, economists expected the figure to rise slightly to 52.1 from 51.9 in October. several economic data releases are on the calendar.
The key report for the week, however, is nonfarm payrolls for November on Friday. This figure will be particularly important given the expectations for a rate hike in December. Consensus estimate is for an increase of 180K jobs.