Disappointing US data of late forced investors to pare back Fed rate hike expectations while concerns about the impact of strong USD seem to linger after the IMF downgraded its US growth forecasts citing the strength of the greenback. Fed’s Beige Book released last night further corroborated the view that the US real economy is feeling the strain from the recent dollar rally.
Currency appreciation seems to be hampering US manufacturing exports. In addition, the combination of strong USD and low oil prices is taking its toll on the US mining industry. The dollar rally and its impact on the US but also EM economies and global financial stability will feature prominently at the semiannual IMF and World Bank meetings that are about to start in Washington.
Of course, the dollar bashing is not always justified and, if anything, the latest reaction in the markets is one of a surprise more than anything else. Indeed, a consumer-based economy like the US should only benefit from lower imported prices and utility costs on the back of FX appreciation. In addition, currency weakness outside the US is helping global recovery.
All told, we suspect that for the dollar sentiment to improve again in the very near term, we need more positive surprises from the upcoming jobless claims and housing data (today) as well as CPI tomorrow – to see the dollar uptrend resuming. Even in this case, however, more evidence that the Fed is still divided on the timing of lift-off (we have Fisher, Lacker, Lockhart, Rosengren and Mester all speaking later today) could mute any currency gains.
Against this background, markets could continue to pare bets on aggressive USD-appreciation especially against risk-correlated and commodity currencies in the very near term. CAD and NOK seem supported by stabilizing oil prices. The dollar could remain vulnerable against the two if there is more evidence that the US crude production is falling further. CAD also supported on the back of fairly hawkish BoC which revised both its inflation and growth forecasts yesterday signalling no need for rate cuts anytime soon.
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