Macro Outlook
The strength of the US dollar has been a major story over the past few months with forex major pairs having been hit incredibly hard. According to Reuters, since 1st July (around the time at which the Dollar bull run started to gather momentum), the New Zealand dollar has been the worst performer major currency versus the Dollar. Measured on a relative basis against the trade weighted dollar (Dollar Index), the Kiwi is down 18%. This is because at the same time that the US dollar has been strengthening, the market has had to price in a perceived divergence in monetary policy stance as the Reserve Bank of New Zealand has shifted from its previous tightening cycle. Another central bank also signalling no intention to tighten has been the Reserve Bank of Australia, leaving the Aussie dollar as the second worse performer with a relative decline of around 16%. The best performers (or should that be “least worst”) are the Canadian dollar which is down a relative 13%, closely followed by sterling which is down around 14%. The reason for the better performance, a perception of more stable monetary policy with a potential view to tightening. Volatility is on the rise in forex markets and it is all because we are finally seeing the impact of perceived monetary policy divergence. About time too.
Must watch for: US FOMC meeting minutes
Impact: Much of the impact of the minutes will have been mitigated as the Fed has already released a statement whilst we have already heard Janet Yellen’s latest thoughts in her press conference. However, the meeting minutes will be scoured over for who may be ready to follow the dissenting voices of Richard Fisher and Charles Plosser. There will also be attention paid to the developments over the term “considerable time” which stayed in an also the driver behind Yellen’s assertion of monetary policy becoming data dependent in future. This could drive further dollar strength.
Foreign Exchange
The incredible dollar strength continues. Hints at a potential correction in the middle of last week after disappointing ISM manufacturing data were completely blown out of the water following the strong Non-farm Payrolls report. The basket of dollar currencies, the Dollar Index (.DXY), continues its inexorable climb towards the highs of 2010 at 88.4 (currently at 86.7) and it is difficult to know what will stop it in the near term. The FOMC meeting minutes should not contain too many surprises this week, whilst there is little else for the dollar to trip up on. The ECB may have disappointed the market through its reticence on QE, however the monetary policy divergence with the Fed is fairly well set now. Friday’s Non-farm Payrolls means that in 7 of the past 8 months the US has added over 200,000 jobs, generally seen as the marker for the economy net adding jobs. The Bank of England is conceivably the only central bank that could hike rates before the Fed, but the economic data for the UK is not as strong as the US now. The Fed’s “dot plot” suggest the prospects of an accelerated tightening and this will help to drive a strong dollar. This is not the time to bet against the dollar.
WATCH FOR: Volatility may begin to calm down after a hectic week last week. However there is still a raft of central bank monetary policy updates, from the Bank of Japan, Reserve Bank of Australia and the Bank of England to move the majors, whilst the Fed also posts its meeting minutes.
Indices
Earnings season really cannot come soon enough for the bulls. Nervous equity investors need something to focus their attention on because without positive corporate newsflow, the bears have been in decisive control. However, perhaps Friday’s Non-farm Payrolls report has been a turning point, as investors bought back in on high volume. The disappointment on Thursday following the ECB’s lack of clarity of the size of ABS purchases and Draghi refraining from plugging the ECB’s intentions over full blown QE put investors in fear than the ECB will remain behind the curve. However the strong payrolls report gave investors renewed vigour. The key is now to continue this vigor, and build up some positive momentum. For that they will have to look towards earnings season which unofficially kicks off stateside on Wednesday with Alcoa. Exactly how earnings season develops will be the determinant behind whether the S&P 500 can push once more into new high ground or not. Traders will be looking out for growth in both earnings and revenue, but also the all important outlook statements. With macro data broadly on an improving trend it is important that this is also seem on a corporate level too.
WATCH FOR: There is not a huge amount of Tier 1 economic data to drive markets so investors will begin to look towards the start of earnings season in the US to drive sentiment.
Other Assets: Commodities & Bonds
The US dollar is acting like an unstoppable juggernaut and commodity prices are getting smashed. Gold had been almost holding up fairly well in the face of the recent dollar strength, that is until Friday, with the strong Non-farm Payrolls which gave the commodity bears renewed reason to sell and resulted in a breach of $1200 on gold. Silver is also under threat, whilst the oil price also continues to fall, although WTI continues to outperform Brent Crude.
Weakness PMI data has resulted in a surge into sovereign fixed income once more. The manufacturing PMIs from Germany the UK and US all disappointed the market and the reaction was to pile into government debt on the expectation of necessary QE from the ECB, whilst also potentially holding the hawks on the Bank of England and the Fed at bay. That may hold true for Germany and the UK, but the strong Non-farm payrolls have turned seen an about face on Treasuries, sending yields sharply higher. This week’s FOMC meeting minutes will be interesting now.
WATCH FOR: With just the FOMC meeting minutes due out of the US this week there could be little to shake the bears from their strangle hold on commodities this week. Sovereign bonds as well could continue with their recent trends too.
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