The US Dollar has not enjoyed the past week or so. Data from the world’s largest economy has been weak of late and last night’s Federal Reserve minutes showed a central bank that, while eager to expound the strength of the US economy, remains concerned over a number of issues. It is these issues that have shifted the market’s view away from a June rate rise by Janet Yellen and the rest of the FOMC, weakening the USD in the process.
The lack of inflation in economies at the moment is an obvious risk to anyone forecasting imminent rate hikes, with some members of the Fed arguing that, although headline inflation is down as a result of decreased food and oil prices, a necessary pressure on prices from wages is not yet being seen. Indeed, on wages, the Fed stated that “tepid nominal wage growth, if continued, could become a significant restraining factor for household spending.”
The most interesting comment, however, was around the US dollar itself. As we have noted previously, US companies spent most of the latest earnings season reporting strong revenues blighted by an noncompetitive USD that made overseas sales less attractive to export markets. Apple (NASDAQ:AAPL) said it, as did Microsoft (NASDAQ:MSFT.O), Pfizer Inc (NYSE:PFE), Ford (NYSE:F)and many, many more. The Fed has by no means weighed into the currency war like the 101st Airborne but noted that the strength of the USD was “restricting” exports.
Positioning – i.e. how invested or not the market is in an asset – continues to suggest that the USD is the favoured currency of most investors moving forward but last night’s comments from the Federal Reserve may have just clipped its wings.
Sterling marched higher against the USD, and most other currencies, yesterday following the latest round of jobs data and last month’s minutes from the Bank of England. Wages rose by 2.1% in December, it was shown, the best number since Q3 2011 and with inflation at the lowest level on record, consumers are in a very good position and so are the prospects for the UK economy.
As we have said before real wage increases, currently at the best levels in nearly seven years, represent a silver bullet for the wider UK recovery. Real wage increases come from optimistic employers happy with business conditions, they allow consumers to re-balance spending figures having taken on credit in leaner times and promote growth in generalised output with a central bank more comfortable to normalise monetary policy. Indeed, the Bank of England told us in their latest minutes that they expect to see CPI rising ‘fairly sharply’ after the fall in oil drops out of the basket.
It seems that Greece will finally ask for a six month loan extension later today. Greek officials, unwilling to identify themselves, emphasised the country’s desire for a loan facility and not an extension of the current bailout protocol. As we said yesterday, it is all about the conditions attached to such a facility that will be the difference between a deal and another few days of acrimony.
Unnamed European Central Bank sources this morning have told a German newspaper that the central bank wants Greece to introduce capital controls. Capital controls limit the movement of money over borders and serve to protect a banking system from capital flight and inducing a panic-driven funding problem. The first rule of capital control club however is you do not talk about capital controls as talking about them without enforcing them will only serve to increase the flight of assets before the drawbridge is raised. The rumour smells fishy and hints at a provocation by interested parties to weaken the Greek government’s resolve.
