Long-Dollar Trade Still Lives
Dollar moves higher as European markets fall The dollar pushed higher against a basket of the other major currencies on Monday as European stock markets dropped amid persistent concerns over the outlook for global growth.
Market sentiment was hit as oil prices resumed declines as hopes faded for a deal between major producers to curb a massive supply glut.
Meanwhile, a report showing that euro zone investor confidence deteriorated sharply this month highlighted the problems in the global economy.
The Sentix index of investor morale hit a 10-month low in February, dropping from 9.6 to 6.0.
Stocks globally have had a rough start to 2016, hurt by tepid U.S. growth, falling oil prices, and concern the world faces a China-led slowdown.
The euro fell to the day’s lows, with EUR/USD down 0.28% to 1.1124.
The dollar was weaker against the yen, which tends to be bought by investors in times of risk aversion, with USD/JPY sliding 0.2% to 116.65.
The U.S. dollar index, which measures the greenback’s strength against a trade-weighted basket of six major currencies, was up 0.2% to 97.16.
The index ended the previous week down 2.61%, the largest weekly percentage decline since October 2011 as weak U.S. economic reports and dovish comments by a Federal Reserve official raised doubts over how much the central bank could raise interest rates this year.
But the greenback moved higher on Friday boosted by the largely upbeat U.S. employment report for January.
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It's been a brutal week to be long U.S. dollars but Friday’s nonfarm payrolls report gave investors a glimmer of hope that the long-dollar trade is still alive. Although job growth slowed materially in January, the greenback traded higher against most of the major currencies on the back of a lower unemployment rate and higher wages. The Federal Reserve may be worried about global market volatility and low commodity prices, but it will be difficult for them to ignore an unemployment rate below 5% and earnings growth at its strongest level in a year. Every part of Friday’s labor-market report -- aside from top-line job growth -- beat expectations including average weekly hours, manufacturing payrolls and labor-force participation. Americans are working more and earning more, which is exactly what the Fed wants to see before interest rates are increased again.
BUT, investors shouldn’t get ahead of themselves and buy dollars in droves because one piece of data is not enough for policymakers to pull the trigger. There’s still about 6 more weeks to go before the next FOMC meeting and we’ll get the opportunity to see whether the labor market maintained its strength in February. While the outlook for the dollar has brightened after Friday’s jobs number, the next move for the dollar hinges upon Janet Yellen’s testimony on the economy and monetary policy on Wednesday. If she shares Dudley’s cautious outlook, the dollar will resume its slide. But if she puts on a brave face -- and we think she will -- the dollar’s recovery could gain traction. If we take a step back, all signs point to less Fed tightening this year; but at the same time, most economic reports show an outperformance of the U.S. economy, which at the end of the day should make the dollar more attractive. The problem is that everyone piled into the long-dollar trade and last week’s wake up call from Dudley scared many investors out of their positions. In order for the dollar to regain strength, we would need an endorsement from Yellen in the form of continued optimism for the U.S. economy.
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