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Markets Advance, US Dollar Falls Ahead of Fed Meeting | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Market Highlights:
US Dollar Falls, Equities RallyAs the week begins, the US dollar is continuing to lose ground in the aftermath of Friday's disappointing non-farm payrolls report. The headline jobs number declined by 131,000 positions during July, while June's 125,000 jobs lost was revised to 221,000, confirming the slowdown fears of many analysts and leading to heightened expectations around tomorrow's Federal Open Market Committee meeting. After gaining for much of the early part of the year, the US dollar has now fallen almost 10% on a trade-weighted basis since early June. With the weekend's losses, the currency has now fallen to a three-month low against the euro and a six-month low against the pound sterling as investors have turned bearish on the US economy's growth prospects relative to the other major economies. The euro currently sits in the high 1.32s and the sterling is pivoting around the 1.60 mark. Equity markets worldwide are seeing moderate rallies, with traders expecting further growth-supportive measures from central banks and governments over the next few weeks. With signs of weakness popping up around the global economy, investors foresee more cash being printed by monetary authorities, which tends to boost asset prices. Gold has also jumped past the $1,210 an ounce mark as investors seek to protect themselves from a potential decline in the value of fiat currencies. Canadian Dollar in August DoldrumsThe dropping US dollar translated into slightly higher crude oil prices over the weekend, with a barrel going for $81.68 this morning. Copper climbed 1.4%, and tin, lead, zinc and aluminum all rose as traders evaluated relatively low stockpile levels and bought the commodities as a hedge against further US dollar weakness. Soft commodities also saw rallies, although these moves are likely being driven by supply concerns in the wheat market more than the global economic environment. While the Canadian dollar initially gave up ground on Friday's release, the market stabilized quite quickly and the narrow trading range remains intact this morning. Resistance at 1.0239 and support at 1.0326 are bracketing trading activity, while thin August trading volumes and a bare economic calendar imply that the currency will continue to take direction from the equity and commodity markets today. Few proprietary traders will be willing to make significant moves outside of this range prior to tomorrow's Federal Reserve announcement, and risk reduction will remain in the forefront for many large institutions and corporate hedgers. Quantitative Easing Redux?The largest companies in the United States have aggressively cut costs and kept spending disciplined even as economic fundamentals have improved. Up until Friday morning, investors were rewarding the equity markets accordingly, broadly pushing up indexes over the last month as earnings came in above expectations. However, Friday's release illustrated one of the logical consequences associated with cost cutting – it can have a negative side effect on employment levels, keeping jobless rolls at structurally high levels. With a large portion of the population sidelined and consumers generally pessimistic as evidenced by recent sentiment reports, consumption remains under pressure and significant slack persists across the American economy. Given this environment, tomorrow's meeting of the US Federal Open Market Committee has gained new importance for financial markets. Further expansion of the bank's balance sheet through asset purchases is on the menu according to many Fed watchers, and short-term bond yields are falling as the markets price in the possibility. Simply reinvesting the proceeds of maturing securities would send a symbolic signal to the markets, illustrating the central bank's commitment to keeping monetary conditions stimulative for an extended period. In the event that the Federal Reserve commits to keeping US dollar funding costs low, the carry trade may be kept on life support for some time yet. As investors borrow in the United States and lend into other currencies, they create negative demand for the dollar, which leads to weakness in the exchange rate against higher-yielding instruments. That being said, if recent history is any guide, weakness in the United States will soon be followed with weakness elsewhere in the global economy, causing funds to flow back into the US dollar. Greenback weakness may be quite fleeting. While we see an extremely dovish statement being released, anything other than a reinvestment of investment proceeds seems unlikely for the time being. The Federal Reserve tends to take a wait and see attitude towards economic data, preferring to let time remove statistical "noise" from the picture before making big moves. Compounding this is the fact that further quantitative easing measures would be of debatable efficacy when bond markets are already flirting with negative yields. Either way, the Fed announcement at 2:15 pm Eastern tomorrow afternoon will almost certainly lead to volatility in the market – be prepared to seize opportunities, and stay tuned! By Karl Schamotta, Market Strategist,
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