The release today of the figures pertaining to durable goods orders in the US is likely to influence the next short-term moves of the USD and the US Dollar Index. Still, Friday will be the day that will define how markets will perform next week. Janet Yellen will make a public statement Friday morning, which is sure to stir the markets far more than tomorrow’s US economic data ever could.
At Ridge Capital Markets, we believe that Yellen is likely to make a balanced statement, only partly corroborating her FOMC colleague’s recent statements about a possible rate hike in June, while not going fully hawkish.
In addition to that, we believe that the Fed is unlikely to raise rates in June – instead, we think the odds greatly favor a July rate hike.
Our views are grounded on:
- One week after the Fed’s June live meeting, the UK will vote to either stay in the EU, or leave the union. While markets are generally complacent and believe that a Brexit is unlikely, the truth is that it remains a serious possibility – and, if it happened, the USD would skyrocket against the GBP and the EUR, along with a number of other currencies that would face the collateral damage of such a scenario. We do not believe that Janet Yellen wants to add even more tensions to currency and financial markets by hiking rates one week before an uncertain British referendum outcome.
- China has been more or less quietly devaluing the CNY against the USD, since it needs to deal with its cooling economy and strong currency that are incompatible with its very large and deep banking system problems. This also affects other emerging currencies, which can’t afford to have stronger currencies than the one of their main trading partner and commodity client – China. So, regardless of what the Fed does, the CNY and emerging currencies are already losing ground against the USD. We do not believe that Yellen would want to send this trend into hyper drive as early as June.
- The ECB and the BOJ are the winners of the recent USD recovered strength, since the EUR and the JPY have been finally giving up gains against the US currency. If the Fed were to hike rates in June, the EUR could easily drop to 1.05 and the JPY could easily drop to 125. While Draghi and Kuroda would love that, this would put even stronger pressures over China to devalue the CNY, which is competing with the JPY.
For all these reasons, and while we are very bullish on the USD (betting on a natural bullish trend that we believe will go on developing regardless of any rate hike), we do not expect Yellen to surprise the markets with a strong hawkish statement, let alone with a June rate hike.
This means that, while in the medium-term we recommend traders to stay long USD/EUR, USD/JPY and USD/CNY, in the short-term we believe that the best step to take is to wait for Yellen to speak on Friday, so that markets are cleared from the upside or downside kneejerk reaction that Friday is likely to bring.