US dollar strength has been making pips for dollar bulls left and right, but is a strong USD good or bad for the US economy? Also, will the Fed finally hike rates?
If you’re a frequent online shopper, then you’d probably know that a stronger local currency is usually good news for consumers. For example, an electronic nasal hair trimmer imported straight from Japan priced at 10,000 yen, would cost fewer US dollars when USD/JPY is trading at 120 comparing to the exchange rate of 80.
Just like you, any company that imports stuff from outside of the US into the US is now cracking walnuts with their tails. Ok, that was a Persian language expression translated directly into English which simply means, they are super excited. Now can a strong USD ever be bad thing? The answer is YES. As I’ve mentioned in Invest Diva’s Trading course, a strong local currency can make the country’s exports more expensive in other countries. For example a Sikorsky helicopter made in Connecticut would would cost more for an Aussie celebrity in Melbourn when AUD/USD is trading at 0.76 versus an exchange rate of 0.95.
So what’s gonna happen to Ms. USA moving forward? At the last FOMC meeting, the big focus was the inclusion or removal of the “patience in beginning to normalize” monetary policy followed up with a bunch of mixed signals. But overall, currency traders believe that the Fed rate hike is coming, with economic data continuing to look bright for now, it’s likely to be happy days for bullish traders of Ms. USA for the foreseeable future.
The next big question is whether the strong US dollar will slow the U.S. recovery. Do you think it will influence the Fed to see low rates as appropriate for a longer period of time? Come on over to our social media and let me know.
Global Markets Rally
Global equity markets were all trading comfortably higher yesterday. It could be because the optimism that China’s hand might be forced (by falling inflation) into more stimulus measures led markets higher.
The FTSE was the poorest performer of the day compared to its European equivalents, with only modest gains. This is despite the UK main list having a large mining contingent, which we thought would have benefited more from their largest customer talking about stimulus measures. The answer, apparently, is in the uncertainty surrounding the election. Ed Miliband is scoring points on refusing to hold a European referendum, though his party is seen as traditionally unfriendly towards business, an image he is trying to shake off.
The Bank of England (BoE) has now entered their pre-election blackout period, meaning no interviews or speeches until after the election. This hasn’t stopped them outlining this years’ banking stress tests though. The tests will show up any weaknesses that banks may face if certain global economic conditions were to play out, in the hope that identifying them early will prevent another RBS/Lloyds situation further down the line. This time round the tests focus on a sharp slowdown in China, oil prices below $40 a barrel as well as a 20% fall in UK house prices, interest rates cut to zero and a contraction in the UK economy of more than 2%.
Elsewhere, Greece say that their list of reforms is a basis for negotiations and that talks are progressing well. On the other side of the table, aides to the decision makers say the list if far from being a basis for agreement and there are vast differences between the expectations and the realities that Greece has presented, particularly on labour market and pension reforms. Tsipras has gone back to phrases like ‘honourable compromise’, which will fall on deaf ears in Europe, but more closely reflects the rhetoric he used to get elected.
In the meantime, there is an apparent rebellion against Mario Draghi, who has kept the Greek banks going by extending ECB liquidity assistance to them, whereas members of his team believe that Greece don’t qualify for as much credit as they have got.
The ECB might also find themselves a victim of their own rules when it comes to QE, according to the Wall Street Journal. The central bank should be buying around €11bn a month of German bonds as part of their QE programme, but will struggle to find supply as the bonds they buy have to yield more than their current benchmark interest rate of -0.2%. A large percentage of German bonds are already trading below this yield, which either means the Bank have to cut rates to make more bonds eligible, or re-write their rules on losing more money than they otherwise would.
From the Fed, we’re still hearing that a rate rise is likely this year and that their inflation target of 2% is still very realistic. The Dollar is gradually regaining the position that we saw before Janet Yellen’s last statement, but is taking much longer than before as investors are starting to question whether or not the inflation part of this puzzle is achievable.
Looking to today; Iran is on the agenda as the self-imposed deadline of the P5+1 talks over its nuclear program is today. Washington say there is a 50/50 chance of a deal happening, so we’ll just have to wait and see.
On a data note, UK consumer confidence came in at a 12 year high overnight, but this hasn’t impacted Mr. British pound or FTSE futures. Later on we see the final reading of UK GDP, European inflation data and unemployment numbers and then the US session has consumer confidence and a few Fed speakers.