The markets may seem to have taken a cue from the March jobs reports, which could at best be termed “disappointing.” Ever since the numbers were published, there has been an immediate growing echo of voices questioning the Fed’s rate hike plans. The loudest of all being Goldman Sachs noting that “the right policy would be to put hikes on hold for now” and the most recent comments from Fed’s William Dudley who noted that the Federal Reserve has taken note of the weakness in the jobs report and that it was unclear on the rate hike lift off.
Gold and other commodity risk currencies are attempting to stage a rally in a holiday thinned trading since last Friday. There are also calls for a weaker GDP output during the first quarter of 2015, which is tipped to come in weaker than the Q4’s growth of 2.2%.
US Q1 data tends to be weaker than expected
Putting aside all of the noise, looking to the charts, what we notice here is a seasonal trade at play. Firstly, it wasn’t long ago that in early 2014, the US economy posted dismal growth. Back then analysts and economists alike were expecting the Fed to continue on with its QE policies by postponing its taper plans. However, things changed at the turn of Q2 which showed growth picking up and by Q3 of 2014, the US economy posted a robust growth of 4.6% and 5% respectively.
Traditionally, the spring/summer periods of the year are often seen as down months for the US Dollar and understandably, the Euro, Aussie and Gold often gain on the US Dollar Index’s weakness. Comparing the past economic activity and the sentiment, the current slump noticed in the US economy is but seasonal. While the above factors do raise doubts of a Fed rate hike in June, September still remains on the table.
As an example, the chart below shows a snapshot of the general bearish market sentiment between April – June of 2014, which saw the markets being overly pessimistic on the recovery of the US economy. It is now anyone’s guess as to how the US economy performed since Q2 of 2014.
Figure 1: Market Sentiment, April - June, 2014
In terms of timing, a September rate hike duly fills the puzzle as the US Dollar Index tends to pick up steam by July/August.
From a technical perspective as well, the Dollar Index rallied relentlessly since June/July last year with little to no corrections made in its uptrend. Looking at things from this perspective, the current weakness in the Greenback, coupled with the seasonality of the Dollar fits perfectly fine within the overall scheme of things.
Another factor that is well worth considering is the over optimism amongst the economists polled when it comes to building market consensus. This is typically seen when, in anticipation of a major monetary policy move, the economists start to be very optimistic in their outlook and is probably one of the reasons why the markets react adversely when any economic data, especially from the US tends to miss estimates.
On the other hand, a deteriorating economic condition often spells a pessimistic view in terms of the consensus, as can be currently seen in case of the Eurozone. It is therefore not surprising to see how data from the Eurozone manages to beat estimates consistently while it is the opposite for economies such as the US.
US Dollar – Still strong, albeit some headwinds
While the general sentiment might continue to overwhelm the markets with a pessimistic outlook for the US Dollar, traders would be well rewarded if they manage to cut the noise out and look at their trades from a longer perspective.
The Dollar index looks poised for a much needed correction and remains to be bullish. In this aspect, buying the US Dollar on dips towards mid-April, late May could offer some favorable risk/reward trades in the longer term.