The US dollar has turned in its best two-week performance in a year this month.
The US Dollar Index – a measure of the value of the dollar against a basket of major currencies – has rallied 2 per cent. After initially breaking down below 92.00 (for the first time since January last year) the US Dollar Index reversed to move up to 94.80 – a gain of more than 3 per cent in nine trading sessions.
A look at the recent data flow from the US would not suggest a major divergence in the trend of the US growth story. In fact, the most recent US non-farm payrolls report would have dampened the growth picture and resulted in a bout of dollar weakness – the bad news is good news for the dollar – as has been the trend for the past few quarters.
US non-farm payrolls for last month came in at a sluggish 160,000, well below expectations of 200,000 and far below the previous reading of 215,000 posted in March. Private payrolls were also weaker, at 171,000, below 190,000 expected and 195,000 in March.
The overall unemployment rate was at 5.0 per cent, in line with last month’s reading but worse than the street expectations of 4.9 per cent. This would probably be because of the shrinking labour force – the participation rate fell to 62.8 per cent.
Perhaps the only shining spot on the report was the uptick in wage growth – the year-on-year average hourly earnings grew to 2.5 per cent versus the expected 2.4 per cent and higher than 2.3 per cent from the previous month. The rather bearish report led to the dollar being sold off aggressively. However, the sentiment was short-lived and the dollar continued to build on its impressive gains from the week before.
Judging the market’s reaction in the days following the latest jobs report; and with no clear fundamental support and little to no deviance in Fed expectations (markets have now priced in a zero per cent rate hike possibility at the meeting next month) it is clear the recent upside move in the dollar has been driven largely by speculation momentum. And it has been further boosted by the unwinding of the dollar short positions, which were built up in two large bear moves – from the end of March (triggered by the first dovish Fed statement) and at the end of last month (triggered by a weakening US data docket and boosted commodity prices).
What this means for the dollar is that markets will perhaps not be so sensitive to the US data docket. We expect volatility on an intraday basis and bouts of dollar weakness, however this will not be the driver for weekly and monthly trends.
Since the markets are now pricing in zero action at the next Fed meeting, the dollar will now continue to trade in the range between 92.50 and 96.50 through to the next month – with no major theme expected to develop into a larger break out of this channel – on either end.
Along with the payrolls, the US inflation figure is a key indicator for future Fed action and will cause some volatility on intraday basis.
Last month’s US inflation figure could show slight improvements as a result of rising commodity prices, but the core inflation rate (stripped down from energy prices) is expected to slow to 1.4 per cent (down from a 1.5 per cent previous reading). Although far from the Fed’s target of 2.0 per cent, expect any improvements above 1.5 per cent to lead to dollar weakness on an intraday basis and vice versa. However, this will not affect longer term dollar trends.
And finally, gold has been circumspect to the recent dollar strength and will continue to trade directly inversely with the dollar. Over the course of the next few weeks we expect the Dubai Gold & Commodities Exchange Gold contract to be capped at US$1,303 an ounce on the upside with support coming in at $1,260 levels.
Gaurav Kashyap is the head of futures at AxiTrader ME