The last week of April is eventful. The Reserve Bank of New Zealand, the Federal Reserve and the Bank of Japan hold policy meetings. The UK, Eurozone, and the US provide the first estimates of Q1 GDP. Japan, the Eurozone, and Australia report consumer prices, while the US updates the Fed’s preferred (targeted) inflation measure, the core deflator of personal consumption expenditures.
The US dollar has had a rough few months. It has fallen against most major and emerging market currencies this year. A critical issue for global investors and policymakers is whether the dollar’s uptrend is over, or is this just a respite. Much is at stake with the answer.
Equity markets are seeing this week’s gains trimmed after the S&P 500 fell 0.5% yesterday, recording its biggest loss in two weeks. Disappointing earnings in some tech leaders spurred profit taking. The US 10-year Treasuries are consolidating the week’s nine basis point increase in yields after nearing 1.90% yesterday. Asian bonds yields tracked US Treasury yields higher while European bonds are narrowly mixed as they consolidate yesterday’s increase.
The US dollar has been largely confined to yesterday’s ranges against the major currencies. China’s yuan slipped lower for the first time in four sessions, while the Shanghai Composite fell 2.3%, the most since the end of February.
Global capital markets staged an impressive recovery after the initial reaction to the failure to freeze oil output sent reverberations through the oil markets, commodities, and Asian equities. The sharp reversal begun in Europe and extended in North America has been sustained.
Oil prices remain firm. Perhaps the realization that the labor dispute in Kuwait has reduced output by as much as 60% (to 1.1mln barrels a day) helped underpin prices. The fall in output may be of greater immediate significance than a freeze.
Oil producers failed to reach an agreement yesterday at the meeting in Doha. That is the main spur to today’s activity. It is not that the outcome was a surprise. One newswire poll found around half of the respondents thought an agreement was elusive.
It is never easy, but the week ahead may be particularly difficult for market participants. It will first have to respond to weekend developments.
First, the front page of the NY Times on Saturday was a report that Saudi Arabia gave the U.S. a warning. If a bill making its way through Congress that would allow it (Saudi Arabia) to be held responsible in American court for the terrorist strike on 9/11, the sheikdom would sell its Treasury holdings, and other US assets, which otherwise could be frozen.
After initially extending its recent recovery gains against the major currencies, the US dollar began consolidating in the European morning. An unexpected shift by the Monetary Authority of Singapore, replacing a modest and gradual currency appreciation with a more neutral stance, coupled with softer oil prices and weaker European equities, appears to have weighed on emerging market currencies.
The US dollar bid well in Europe and is poised to start the North American session with the wind to its back. Despite firmer equity and industrial metal prices, most emerging market currencies are also succumbing to the rebounding greenback.
Over the past three months and the past month, the dollar has fallen against all the major currencies but the British pound. Sterling’s underperformance can largely be explained by uncertainty created by the Tory government’s sponsored referendum on continued EU membership.
