Dollar: Can you hear me now?
Can you hear the dollar's message now? The dollar index basket against currencies of six trading partners was hovering near four-month highs on Wednesday morning having broken above its 200-day moving average for the first time in about a year. Ahead on Wednesday was a Fed policy announcement that most participants would deem to be amongst the least catalytic of the year. But anticipation that the FOMC's could fuel further dollar and treasury yield momentum was nonetheless heightened. Quickening forex developments were a wake-up call for many. The latest Commodity Futures Trading Commission positioning data, whilst severely lagging, suggest overnight moves came as a nasty surprise for some. Dollar short trades were at a 6½-year peak by the middle of last month. No doubt the level of enthusiasm to sell the dollar has abated significantly since then, judging partly by accelerating momentum. Tuesday’s Dollar Index rise was the most extended since late March with DXY notching an 11th straight session of almost consecutive gains.
Investors face dissonance
There’s little remaining doubt that stock markets are as uncomfortable with the dollar’s revival as the greenback’s short sellers, though as noted earlier this week, for whatever reason, global equity markets have adhered to a pattern of promising early session trading that deteriorates later. It seems the dissonance of elevated yields and what they mean for the inflation outlook and policy rates becomes too much for investors to bear as trading wears on. There was a positive tint to U.S. stock futures as I wrote this, no doubt helped by the latest raft of impressive corporate reports. In the States they now amount to 80% of earnings beating market expectations. Apple led this boom overnight with its latest record-breaking quarter for profits and revenues, albeit iPhone sales, probably its most pivotal metric, missed Wall Street forecasts by about 100,000 by shifting 52.2 million units. Still, more attention was on a much-anticipated expansion of the $835bn dollar giant’s already huge pay-out programme, which Apple duly executed. It doubled total shareholders reimbursements to $100bn a year. Beyond such largesse, the group gave a strong impression of slightly besting or largely matching most investor expectations, having customarily trounced them for about a decade. With guidance on its current quarter’s revenues narrowly above the midpoint of consensus forecasts, Apple shares, still barely higher for the year, may remain vulnerable to weakening market sentiment, despite the group’s unprecedented cash distribution.
StanChart revenues light
Even the largest European group’s reporting on Wednesday could not match Apple’s spectacular news, with Standard Chartered falling victim to the ‘not good enough’ trend seen during this earnings season, despite producing a 20% rise in pre-tax profits on rising loan demand and better asset quality. StanChart stock traded about 2% lower at the time of writing. Negatives included that revenues remained stubbornly light of expectations, there was a lack of significant remediation in loan impairments, and uncertainty over the timing and impact of changes to how it assesses risks from certain “corporate exposures”. Unlike many London and Wall Street-listed StanChart, has relatively modest exposure to potential revenue boosts from market volatility. Although a variable source of turnover, the deficit added to investor concern that StanChart’s best quarters for three years could turn out to be a high point.
Don’t discount this Fed announcement
The day’s remaining corporate slate is huge though lacks Dow Jones Industrial Average components, so the effect on sentiment and index impact from earnings alone may be limited. More attention is likely to be on Wednesday’s remaining macroeconomic standouts including ADP Inc.’s take on payrolls. The series is seldom ignored but has an ambiguous relationship to the official data and an equally unclear trend in terms of the market’s reaction. It may be treated as neutral unless it varies markedly from a forecast of 200,000 new hires in April. The Federal Open Market Committee’s monetary policy decision at 7pm London time will receive more rapt attention. On the one hand there’s a clear temptation to discount the event given the almost certain lack of significant changes, on the other, this could be a mistake given the fervent atmosphere surrounding the dollar. The Fed’s statement is almost certain to prime readers for an additional 25 basis point rise in June, confirmation of implied probabilities from fund futures trading that bake in expectations to almost dead-certainty. Beyond that, among areas that policymakers could still surprise is the disparity between the U.S. unemployment rate at 4.1% and the Fed’s neutral rate at 4.5%. If the Fed signals it is eyeing that gap, markets could over-react to the risk implied to the current pace of tightening
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