Over the last 9 months the US dollar has been on a proverbial tear
with successive monthly gains against basket of currencies.
This 25% rise from lows of 79.74 in July last year saw the index peak at 100.39 in March this year.
The sharp decline that we’ve seen in April would appear to suggest that we’ve seen the highs in the medium term and that could well be significant for stock markets in Europe as well as a number of currency pairs in the coming weeks.
At the beginning of this year all the talk was about the likely timing of a US rate rise
, while European QE had yet to even get under way.
Since the beginning of this year the German DAX has risen quite sharply at the same time the euro had been falling.
This now appears to have reversed with the rebound in the euro knocking the DAX down over 6% from its recent highs. If the euro were to continue to keep rising, this could well knock the DAX and broader European markets down further.
Diminished expectations of UK rate rises have also weighed on the pound
and were largely being driven, not by weak economic data, but by a central bank that was happy to show a reluctance to overhype market expectations of an imminent tightening of monetary policy.
This low key approach by the MPC contrasted starkly with a number of US policymakers, who it seemed, were almost itching to fire the starting gun on a normalisation of monetary policy
This belief that we would see some form of move by the Fed has continued to grow as US jobs growth continued to hold up fairly well, increasing the prospects of a June move.
This growing divergence was at odds with virtually every other global central bank
as we saw multiple rate cuts in the first quarter of 2015 from central banks across the world, as they sought to combat deflationary pressures, which have been rippling out across the world in response to plunging commodity prices.
This divergence was raising concerns that the Federal Reserve could be on the cusp of a potentially destabilising policy mistake
as the rising US dollar started to impact the US economy.
This has slowly started to become apparent, not only in US company earnings which have come in much lower than was expected at the end of 2014, but also as a result of the sharp drop in the oil price which has shrunk margins sharply in the US oil and gas sector.
The month of April would appear to have halted the US dollar’s relentless march higher, and to quote TS Eliot was “the cruellest month” for 4 years.
It also could well have served as a warning shot for further US dollar declines, which if investors don’t take heed of the warnings given in a number of major currency pairs, could add up to further woes in the months ahead.
Starting with the US dollar index
we’ve seen a significant monthly candlestick reversal, which appears to have been replicated on the Australian dollar, euro, and to a lesser extent the pound against the US dollar. It is in these pairs that the market still appears to be underestimating the possibilities of a significant unwind of overweight long US dollar positions.
This week’s break above the 1.1000/1.1050 level against the euro was particularly significant
in that it had acted as a strong cap on at least four previous occasions in March and April without giving way. On the fifth attempt this week the dam broke and we got a sharp move higher which is currently being capped at the 100 day MA at 1.1300.
On a technical basis, what’s happened this month is also significant in that if we are able to hold above this week’s break out level at 1.1000 then we could well be on course for a shake out through 1.1500 initially, and all the way back to 1.2000 in the coming months, after we posted a bullish monthly reversal on the monthly charts.
We’ve also seen a similar type of reversal pattern on the Australian dollar monthly chart
, which given that we could well see a rate cut next week
from the RBA suggests that any move lower in reaction to such a move might well be short-lived.
We know that the RBA wants a lower Australian dollar
, as the Australian economy struggles with the slowdown in the mining sector, but they may be stymied in that regard if next week’s US data continues to disappoint to the downside, and the current rebound in iron ore prices continues.
We’ve heard a lot about the weakness in the latest US GDP number
could well be transitory and as such we could see a consumer rebound in retail sales and core durable goods. There could well be some merit in that argument, but oil prices and gasoline prices would appear to have bottomed out for now, which suggests that any benefit the US consumer got from the sharp fall in gasoline prices has been eroded somewhat with WTI rebounding from lows of $42 in March to $58 now.
Next week’s US jobs numbers are therefore crucial in the context of whether the March payroll number of 126k was an aberration,
or the start of a worrying slowdown in the US labour market. Expectations are for a gain of 231k, but we should also watch for an adjustment to the March number.
In the case of sterling, the fundamentals are more troubling given next week’s general election uncertainty,
but we’ve already seen a move to $1.5500 already this week, and as long as we don’t drop back below $1.5000, then there really is no reason why we can’t head back up towards $1.6000 in the coming months.
Whatever happens in the coming weeks, uncertainty about Greece, UK politics and the prospects for Fed policy on the back of the US economy, currency markets are likely to be highly choppy in the coming weeks.
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