FX MACROECONOMICS
to strengthen markedly as and when the ECB properly moves to the exit and if the recent divergence between US and European data continues in the short term, the Euro could be stronger than many believed just a few weeks ago when it was testing 1.0/1.05 to the Dollar.
Chart 2 – Markit Composite PMIs for US and Eurozone
Last week, Markit released their preliminary ISMs for February and the US survey was a disappointment. In fact, the services and composite ISMs are at levels seen in January 2016 at the height of the financial market’s concerns over China. This survey was taken before the political events of last week. We suspect that business and consumer sentiment may deteriorate in the weeks ahead so that we see the soft data fall back to levels consistent with the hard data.
If like us, you do not believe that these events simply bring the bullish tax cuts closer, then not only should you be thinking cautiously on US equities but also the US Dollar as well as being constructive on high quality fixed income (owning some gold may not be a bad idea either).
20 FX TRADER MAGAZINE April - June 2017 Looking at Currencies
In terms of the Dollar, we are detecting that, whereas US economic data may be beginning to miss elevated expectations, European data remains very robust. Chart 2 shows the composite PMIs for the US and Eurozone, and although it is not right to directly compare the actual levels, it is clear that the US business community is becoming less optimistic
in the last two months
whereas in Europe, business leaders continue to become more confident.
At the same time, the talk around whether the ECB will change policy later this year only gets louder. Te talk is of a potential rise in the deposit rate and a change to the monthly level of QE. We think this may all be a bit premature, but we do expect the Euro
As for the federal reserve, we and everyone else has noted in recent weeks, that they have tried to become just a shade more hawkish. If Trump’s policies risk getting completely bogged down, then there is every chance that Fed rate rises will be curtailed no matter how bullish Fed speakers are. As we have pointed out recently, the Dollar has taken a back seat in recent weeks, and we think that this will continue. This will help high quality bonds.
To sum up, we think that March events in Washington should cause investors in to a reality check. After the majority of investors were wrong footed by Brexit, the Trump election victory and the Italian referendum, making these sorts of market calls is open to failure these days. However, and as pointed out a couple of weeks ago, bubble like valuations coupled with an
equity market
losing momentum are usually decent indicators that it is right to reduce risk.
Stewart Richardson
Chief Investment Officer RMG Wealth Management
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