U.S. Economic Recovery Is Ending? Continue Shorting Dollar?

Historical data shows the current stretch of U.S. recovery could walk into the end, short USD/JPY?

How low the U.S. dollar will go?

Dollar has fallen steadily as the administration endured a series of legislative and legal setbacks, and fell sharply this week after revelations that Mr Trump pressed James Comey, the FBI director, to drop the Russia probe. USD fell to near a six-month low during Friday’s overnight session and it suffered its worst week in more than a year, wiping out all its gains since Donald Trump was elected US president as investors fretted that a growing White House scandal might derail Republican initiatives to boost the economy, and the political outlook has changed considerably over the last couple of weeks.

Meanwhile, cautious comments from FOMC non-voter James Bullard weighted on the USD. Bullard reiterated his support for just one more Fed funds rate hike this year and noted that “the FOMC’s contemplated policy rate path such as two more 25bps rate hikes this year is overly aggressive relative to actual incoming data on U.S. macroeconomic performance.

For this week, markets’ participants are likely to shift into Fed’s FOMC statement for the month of May. The Minutes will likely reinforce the case for a 14 June Fed funds rate hike, and should provide further detail on the FOMC’s thoughts on reducing the size of the Fed’s balance sheet. The support to the dollar should be very limited since market has already expected a rate hike next month.

On Tuesday, the Trump administration will submit its full 2018 budget plan to Congress. But not to get confused, this is unlikely to have a material impact on the USD. The budget will simply outline in more details the administration’s mandatory spending initiatives, not those fiscal reforms market paying attention into.

Does the current U.S. economic recovery is too stretched? Maybe

From the recent major economic data released by the U.S., the slowdown in inflation, ISM manufacturing PMI, with the decline in commodity prices, the U.S. economy is likely to further cool down. Most importantly, the data show that the economic recovery cycle in the United States is nearing its longest in history. The main reason for this long cycle of economic recovery in the United States is highly due to the Fed’s highly accommodative monetary policy.

Now we are in the situation that Fed has to raise the interest rates gradually with little other choice. Because if the Fed not to do so, they may have to raise the rates more aggressively and that carries the risk of leading the economy into recession. Still, the Fed knows the economic condition better than anyone else, there is lacking of the new growth engine.

The chart below shows that there have been 5 periods when U.S. unemployment rate fell sharply in the period 5 times since 1970. Current recovery stretch since 2009 is longest since that one happened in 1990.

In 1975 -1979 years: 4 years         

In 1982 -1989 years:  7 years          

In 1992 -2000 years: 8 years          

In 2003 -2007 years,: 4 years          

In 2009 – now: 8 years so far

EUR/USD may face some technical retracement this week, not fundamental  

Major currencies were mostly weaker against the US dollar this morning, including EUR, EUR/USD may consolidate some of its recent strong gains against the USD and AUD this week. Encouraging Eurozone economic activity, the prospect of the ECB announcing a path to more tapering of its asset purchase program at the June ECB meeting, and improving Eurozone capital inflows will continue to underpin EUR. This week’s EUR highlights are May’s IFO pan German business climate and PMI releases. The data will confirm the robust pace of economic activity in the Eurozone which is EUR supportive.

Our Picks

EUR/USD – Slightly bearish. We expect this pair to move towards 1.1125 in coming days as some technical retracement expected

USD/JPY – Slightly bearish. We expect the pair may move towards 110.80

Gold – Slightly bearish.  We expect slightly improving risk sentiment may pressure the price towards 1246

Top News This Week (GMT+8 time zone)

U.S. : GDP. Friday, 26 May, 8.30pm.

We expect figures to come in at 0.8% (previous figure was 0.7%).

U.S.: FOMC meeting minutes, 25 May, 2am

Fullerton Markets Research Team

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