Last night the Fed’s Brainard provided some more colour on the Fed’s new Flexible Average Inflation Targeting (FAIT) policy. One of the side effects she admitted would be increasing risk appetite and a ‘reach-for-yield behaviour’ investors priced lower for longer rates. Importantly she emphasised that it wouldn’t be the job of monetary policy to deflate any asset bubbles – that would have to come through macro-prudential policy. This all points to a conviction view that the Fed will keep rates lower for longer and with a Fed ready to add more accommodation if necessary, a conviction view is building that the dollar be sold on rallies. For the short term, the dollar has been finding some support at big figures, such as 1.20 in EUR/$, 1.30 in USD/CAD and always 105 in USD/JPY. A market very short dollars may be prone to some short-term profit-taking, but FAIT is a macro theme that will dominate markets for years (it’s up for review in five years). And we suspect major trading partners will be left to mull measures to slow, not reverse their domestic currency appreciation against the dollar. Expect to hear phrases going forward such as the ‘Fed is exporting easing monetary policy through a weaker dollar’. For today, we’ll see the August ADP figure. We doubt the dollar enjoys any lasting gains from a strong number.
USD/CAD failed to move sustainably below 1.3000 and the daily studies failed to follow prices to new recent lows. For the day ahead, support remains at 1.3029, followed by 1.2952 (2019 low). Meanwhile, resistance stands at 1.3105, with a daily close above 1.3207 required to nullify the current downtrend.
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