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On Thursday, November 15, the Fed will once again redeem the bonds from its balance sheet without subsequent refinancing, which will lead to another sharp reduction in the balance sheet and, as a result, liquidity reduction. Usually, on such days, the dollar is adjusted higher, most often against commodity currencies, a little less pronounced, against the yen as a protective currency.
On such days, the dollar usually trades a little higher than at the opening, so, most likely, on Thursday, the dollar will rise against most currencies.
It should also be noted that the market reaction in the days of balance reduction is short-term, followed by partial or full recovery, but the reduction in balance has a pronounced long-term effect, which can prevent the dollar from rolling back after short-term strengthening. We are talking about reducing the monetary base, which is reduced due to the Fed policy.
More recently, it was already possible to observe the market reaction to the reduction of the monetary base. On December 28, 2016, the volume of DB decreased to $ 3.407 trillion, which caused a real panic in the financial markets. The reduction in DB was not associated with a reduction in the Fed's balance sheet, which remained stable. They were the result of Fed operations with non-financial companies in reverse repo; for the beginning of the cycle of growth rates.
The reduction of DB is accompanied by a number of consequences, the most important of which is the increase in the dollar exchange rate due to the reduction in supply. By the end of December 2016, the EUR / USD rate reached 1.035, which at that time was a 13-year low. Many predictions have appeared that predicted the euro to strengthen to parity and even further, to 0.9 from the dollar, but the reality turned out to be more prosaic.
From January 2017, the DB volume began to recover, and immediately the EUR / USD rate went up, that is, the dollar began to weaken. The dependence is quite obvious, and now the situation is similar, although it has other reasons.
To date, the volume of DB is higher than in December 2016, and the markets so far are reacting rather calmly, although some of the consequences are already obvious. For example, the strengthening of the dollar at forex is still quite moderate, but stock markets suffer, where, due to the reduction in liquidity and the rise in the cost of loans, share repurchase operations, which supported the growth of stocks throughout the soft monetary policy, become too burdensome.
Reduction of DB is a long-term driver, objectively contributing to the strengthening of the dollar. At the same time, a number of other factors are forming that can, in the medium term, stop or reverse the trend towards strengthening the dollar, which include a divided parliament, difficulties with the return of production capacity in the United States as part of Trump's reforms, the upcoming congressional debate on the national debt ceiling, and de-dollarization of the global economy and the threat of recession in the US in 2020
At present, the dollar has not yet exhausted the potential for strengthening and will continue to grow in the short term, but this trend is nearing completion and by the end of the year a reversal is likely.
Today, an inflation report for October will be published, taking into account the growth of average wages, growth is possible above the September level, the forecasts are positive, the dollar may react with growth.
EUR / USD
Macroeconomic publications in the eurozone today are not expected, the focus is on preliminary GDP for Germany for Q3 and the development of the situation around the Italian budget. The euro is trading in a range, there is no own driver, the probability of going beyond the range of 1.1250 - 1.1300 is low, positive news from the US will help to resume the decline by the end of the day.
GBP / USD
Today at 3:00 pm CET, Theresa May meets with her cabinet to discuss a draft agreement reached with the EU. The positive reaction of the cabinet can provoke a rise in the pound, but it is unlikely to be strong since then there will be a vote in the House of Commons, where May has a serious opposition.
The pound may be supported by the publication of the inflation report for October, the forecasts are positive, by the end of the day, the pound may go to the resistance of 1.3175.
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