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Dollar Index tests trendline support possibly on curve flattening, focus on tax bill

  • DXY revisits key rising trendline support possibly due to yield curve flattening.
  • All eyes on the Senate approval of the US tax reform bill.

The dollar index (DXY) is carrying a weak tone this Friday morning in Asia, possibly due to continued flattening of the Treasury yield curve.

As of writing, the DXY is trading 0.36 percent lower on the day at 93.50 levels and has breached the support offered by the ascending trendline (drawn from the Sep. 8 low and Sep. 20 low).

Focus on US tax plan

As expected, the House voted and passed their version of the tax reform bill yesterday. The resulting rally in the DXY to 94.00 levels was short-lived. The decline in Asia underscores the bearish undertone in the USD market.

One possible reason for USD weakness could be the narrowing spread between the US 10-year yield and the 2-year yield. The spread fell to 64.72 basis points yesterday; the lowest level since Oct 2007. Curve flattening is bearish for the USD and vice versa.

Looking ahead - the fate of the USD depends on the Senate's approval of the tax reform. Kathy Lien from BK Asset Management says, " the Senate and House still have to reconcile their bills before they are combined into a final plan that is voted on by both houses of Congress... it will still be a long road ahead before President Trump signs tax reform into law".

Dollar Index Technical Levels

A break below 93.40 (Wednesday's Dragonfly candle low) would expose support at 93.05 (Oct. 19 low) and 92.80 (Oct. 12 low). On the higher side, breach of session high of 93.79 would open up upside towards 93.94 (5-day MA) and 94.32 (10-day MA).

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