The leaders of the G8 nations commenced their meeting yesterday, with Syria likely to dominate discussions but global economic issues also remain on the agenda at the 39th summit held in Lough Erne, County Fermanagh. However the currency markets are more likely to be interested in the FOMC meeting communications than the G8 this week.
The USD and where we are at?
To be frank we have received very little new information with regards to Fed policy or the medium term trend for the dollar. Of late Bernanke has spoken, payrolls have come and gone and we are left with little change to the tepid US economic backdrop. The markets have acknowledged that the Fed expects to hit the 6.5% unemployment rate threshold sometime in 2015. Financial markets have moved that expectation up from late 2015 to early 2015. The market has worked what we need to get to a rising interest rate environment. Payroll growth of roughly 185k per month is required! So how have we been doing? The 3 month average is 155k; the 6 month average is 194k. What do the payroll numbers tell us? It’s been quite a mixed bag, Q113 started off positive however since then the figures have softened a little so we await a clear signal.
So over the past 3 months we have seen a trading range of 1.2746 (04-Apr-13) to 1.3390 (13-Jun-13) and seen a 3.45% appreciation in EURUSD since the beginning of the month. This EUR move was largely helped by Draghi’s recent ECB press conference where he backed away from the dovish rhetoric surrounding a negative deposit rate. Draghi appears to use “negative deposit rates” to influence the EURUSD exchange rate by blowing hot and cold on the idea. Draghi strives for a stable exchange rate rather than a falling one and appears more content at a level of 1.30 rather than 1.35 and higher. This is all despite the peripheral economies preference for a weaker Euro similar to levels we saw this time last year at 1.26.
What to look out for this week
The main event this week will no doubt be the FOMC meeting. This meeting includes a statement, fresh forecasts and a press conference by Chairman Bernanke. At the outset there appears little reason for the Fed to adjust asset purchases or even the pace of purchases if you solely look at recent economic data. Although I think it would be un-wise to completely rule out any tapering before year-end.
So on Wednesday Bernanke, similar to his late May testimony, will likely take a balanced view and highlight the potential for QE purchases to be ratcheted up or down based on economic conditions. I think those expecting a clear signal for imminent tapering are likely to be disappointed and that could leave the USD susceptible to further near-term weakness and a test of levels that appear less favoured by the ECB! This may then signal Draghi et al to reference further ECB discussion / plans on negative deposit rates? And so the rhetoric continues, nobody wants a stronger currency but of course nobody would actively talk their currency lower, would they……?