Is the rally over? That’s the big question being asked by those with US dollar risk at the moment. The last few weeks have seen hit hard by the size of the rally in the US dollar, primarily on the back of the Federal Reserve’s stance on interest rates. However, there are so many geo-political stories dominating the news cycle that we have seen investors holding dollars spooked. The is by no means guaranteed to last, but the turnaround could leave many nervous of another total reversal.
President Trump’s to withdraw the US from the Iran nuclear deal has raised many eyebrows, and even left many fearful of the Middle East’s stability. President Trump has already used this tactic with the aluminum and steel tariffs to bring countries to the negotiating table. It has worked so far with Canada, Mexico, Europe and China. The global community will now be hopeful that the same tactic will work on Iran, and bring Iranian President Hassan Rouhani back to the negotiating table.
As the week moves on there will be a larger focus on the macroeconomic data out in the US, with retail sales, housing and mortgage data on Tuesday and Wednesday respectively the biggest risk for investors.
When the European Central Bank (ECB) last met in April, president Mario Draghi hinted that yet again it was inflation that was holding back the ECB when it came to raising interest rates, or beginning to taper back the Asset Purchase Program. Those words make this week’s Consumer Price Index (CPI) inflation number on Wednesday and the GDP reading on Tuesday even more important.
The recent lack of movement in the Euro means that investors will pay close attention to what these readings mean for monetary policy. Any positive move in both GDP out of Germany or the Eurozone as a whole could lead to big movements in the price of the Euro as investors get impatient with the ECB’s slow rate of change, and the perceived lack of action as the Eurozone economy continues to improve.
Italian politics could also play a significant role this week, after the Five Star Movement leader Luigi Di Maio agreed on a coalition deal with the right-wing party League. This story is very much in its infancy but could have a large impact on the Euro as more details emerge.
Sterling has been rocked recently, most notably the poor Q1 GDP reading, as well as the cautious tone of the Bank of England policy setting meeting last week. After being hit so aggressively the Pound could have a chance to regain some of its losses this week as we wait for the UK jobs report. The primary focus will likely be the Average Hourly Earnings ex Bonus, which will help paint a picture on how wages have improved in relation to the lower inflation numbers. If the figures show that the cost of living continues to fall in the UK then that could give Sterling a much-needed boost.
Brexit is of course the elephant in the room as the government still looks to understand exactly what last week’s defeat in the House of Lords means for their plans. There is denying that Brexit is a mess, and the government continues to be questioned on whether they are the right party, and Theresa May the best leader, to take the country through this enormously challenging time both culturally and economically.
NAFTA and the price of oil are the biggest obstacles facing the Loonie this week, and President Trump is at the root of both issues. We continue to see limited movement in the Canadian dollar while deliberations around NAFTA continue. Many were hopeful that a deal would be reached by now and that investors could remove this risk factor, however, we are now two weeks past the date we expected a deal and close to the informal deadline of May 18. All parties seem a long way apart, especially over the sunset deal the US wants to include.
The President’s move to pull out of the Iran nuclear deal has left the price of oil swinging without any real direction. The moves comes after NYMEX (New York Mercantile Exchange) crude broke through the important $70 per barrel level for the first time since 2014. Those with exposure to the Loonie should keep an eye on oil prices this week as the correlation remains high between the two.
There is a lot of data for the Australian dollar to digest this week with wage data dominating the domestic agenda. Wednesday sees both the Q1 wage data and the unemployment rate released, and both come after Tuesday’s Reserve Bank of Australia’s (RBA) meeting minutes. The policy from the RBA in the meeting minutes is likely to remain neutral with expectations not seeing a rate hike until well into 2019. Strong wage growth could always change this picture though.
Chinese data will also have an effect on the Australian dollar as well as we look to retail sales and general activity data due for release. Again, for the Australian dollar, there is a large reliance on the US dollar so keeping an eye on Wall Street, Washington and Twitter is a must for those exposed to the currency.
Despite having a new head of the central bank, the Reserve Bank of New Zealand (RBNZ) still remains dovish over rates as US dollar risks continue to weigh heavily on the currency. New governor Orr has already signaled his intention to keep rates lower for longer, so it seems unlikely that the RBNZ will be drawn to the global policy of rate normalization.
The dovish stance sees probability of a rate hike, much less likely than It now seems that September 2019 is the most likely time for a rate hike. So, this week will not be dominated by the RBNZ, but by the US. However, it’s worth keeping an eye on the GDT Dairy Auction on Tuesday as well Q1 Producer Price Index data due on Wednesday.
Ongoing rate curve repricing and risk asset reaction perfectly illustrate how worryingly reliant investors have become on easy money policies