Two Years of Sideways market!
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For 2015 and 2016 US Dollar gyrate between 94 and 100; First day of September catch the index near 96, a level that it is to be mentioned as the level after Brexit. Next targets are 97.60 and 98.60 and of course the psychological level of 100 from where US Dollar can break and continue upward trend.
From fundamental point of view ( that can move the market), a hike in September can push the index trough next two levels straight to 100 and if 2 hikes will be in FEDs schedule as some voting members claim can also push it above 100 and continue the upward trend of the dollar.
Bear in mind that even dough the Federal Reserve Committee says that employment is at full potential and that is time to normalize the rates, they do not wish a stronger dollar for several reasons:
- a stronger dollar will erode profit margins of big USA corporations that bring the profits from overseas, fact that will turnaround equity markets. And as equity markets are the mirror of the economy, these will tend to do more harm than good as FED is already at low levels with interest rates, especially in the context where 1/3 of the S&P500 is energy related where profits already are shrinking because of low oil prices.
- emerging markets since last financial crisis and even before have borrowed heavily in us dollar and a increase in cost of they borrowed money can create a crisis ( that happen before in asian markets) and can have spillovers over global economy which implicit will hit USA.
- A hike in rates as soon as September will create volatility in markets, things that monetary policies tend to avoid before elections.
So one rate hike is a more plausible scenario even dough a hike can be postponed for next year if oil falls below 40 , price from where USA energy sector tends to start having issues with profitability. In the context where oil stays above 40$ , FED may wait until December to hike and depending where dollar will be it will push it to next level but definitely will not brake 100 level as the move is widely expected.
From the convergence of USD dollar index with oil scenario we can derive the idea that if oil stays above 40 and FED does not harm themselves, equity markets will stay at elevated levels as energy sector most probably already hedged on forward contracts their oil when it was at 50$ these year and cheap money from FED,ECB and BOJ will fuel M&A activity and search for yield in stocks.
Conclusion is that for US Dollar the view is more bullish than bearish.
From fundamental point of view ( that can move the market), a hike in September can push the index trough next two levels straight to 100 and if 2 hikes will be in FEDs schedule as some voting members claim can also push it above 100 and continue the upward trend of the dollar.
Bear in mind that even dough the Federal Reserve Committee says that employment is at full potential and that is time to normalize the rates, they do not wish a stronger dollar for several reasons:
- a stronger dollar will erode profit margins of big USA corporations that bring the profits from overseas, fact that will turnaround equity markets. And as equity markets are the mirror of the economy, these will tend to do more harm than good as FED is already at low levels with interest rates, especially in the context where 1/3 of the S&P500 is energy related where profits already are shrinking because of low oil prices.
- emerging markets since last financial crisis and even before have borrowed heavily in us dollar and a increase in cost of they borrowed money can create a crisis ( that happen before in asian markets) and can have spillovers over global economy which implicit will hit USA.
- A hike in rates as soon as September will create volatility in markets, things that monetary policies tend to avoid before elections.
So one rate hike is a more plausible scenario even dough a hike can be postponed for next year if oil falls below 40 , price from where USA energy sector tends to start having issues with profitability. In the context where oil stays above 40$ , FED may wait until December to hike and depending where dollar will be it will push it to next level but definitely will not brake 100 level as the move is widely expected.
From the convergence of USD dollar index with oil scenario we can derive the idea that if oil stays above 40 and FED does not harm themselves, equity markets will stay at elevated levels as energy sector most probably already hedged on forward contracts their oil when it was at 50$ these year and cheap money from FED,ECB and BOJ will fuel M&A activity and search for yield in stocks.
Conclusion is that for US Dollar the view is more bullish than bearish.
Nota
Trump surprise made 100 level a walk in the park; That's why we call it Trump Rally
Penafian
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