Fundamental Forecast for Dollar: Neutral
- The market does not fully account for a rate hike from the Fed until August of 2017
- Unorthodox ECB monetary policy will likely leverage little Dollar response, but BoJ intervention threats can
- See our 2Q forecasts for the US Dollar and market benchmarks on the DailyFX Trading Guides page
There can be disadvantages to being the world’s most liquid currency. The Dollar’s intrinsic integration into the global financial system makes it particularly vulnerable when its fundamental health is shaken and the world is in a state of flux. That is where we find ourselves now. There is major fundamental upheaval in crucial areas of global economic activity and market stability. And, while much of this does not immediately start out at the Greenback’s doorstep, it won’t be difficult for them to find their way there in short order. If you are trading the Dollar, your focus must include more than just Fed speculation – though that is a crucial component. Global investor sentiment, monetary policy from key FOMC counterparts and oil prices can materially shape the USD’s next move this week.
Starting with the most proximate fundamental motivation, speculation over Fed timing will draw considerable speculation considering the FOMC is set to meet again on April 26-27 (next week). While there are a number of officials who have suggested this month’s meeting is both ‘live’ (meaning it can be a hike like any other), few have suggested it was even a remote probability for a timely follow up to December’s liftoff. However, to stir the Dollar, we don’t need conviction certainty of a rate hike this yearly. All that is necessary is enough of a foothold to persuade the market into believing at least one hike is certain this year and/or even highly probably by June.
Looking at Fed Fund futures, the market doesn’t fully expect the next rate hike until August of 2017 (meetings have not been scheduled beyond March of that year). That is a considerable discount to the FOMC’s own projections that two 25bp moves are due in 2016. This past week offered a range of opportunities to agitate rate speculation (CPI, Fed speak, IMF projections), but nothing materially budged the market’s views. Ahead, we have a few speeches due before the pre-meeting blackout, but the direct US data isn’t the type we usually consider to be effective rate fodder.
Given remarks in the official Fed minutes, reflections from Chairwoman Janet Yellen’s recent speech and the market’s general expectation; the stronger tides for Fed timing may come from abroad. ‘Global markets’ has been cast as an uncertainty for US policy makers, and China is considered center stage of that evaluation. Yet, China’s 1Q GDP figures matched its controlled pace of decent last week, (whether you believe in the figures is another matter) the NBS voiced confidence of a turning point and the IMF’s lamentation softened. Caution over China and Emerging Markets will remain; but recent conditions have stabilized if not improved. The question is permanence.
Further outside influence will come through the policy counterwinds of key central banks. The ECB is scheduled to determine monetary policy this week, but their last effort to escalate accommodation left the market with a distinct feeling that monetary policy at the dovish extreme is losing its influence – and central banks that pursue it, credibility. The BoJ is perhaps taking the route of greater desperation in resorting to conspicuous threats to the exchangerate by justifying ‘extreme’ Yen appreciation. Standard easing is likely to generate limited Dollar schadenfreude gains, but messy intervention will offer at least temporary traction.
The final theme to consider is risk trends. We’ve not seen the Dollar truly rediscover its ultimate haven status is some time, and recovering it would require extreme risk aversion – possible but not something to hold our breath for. In contrast, there is a tangible ‘risk’ aspect to oil prices taking place. Low oil prices, usually considered a boon, are leveraging serious threats in EM economy collapses and debt failure. There is even a direct inflation aspect here that returns to the Fed. It will be important to watch the Doha meet outcome.