Will USD Ever Stop Falling?
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Will the U.S. dollar ever stop falling? The answer is -- of course -- that it will. But the real question to ask is when. Since the beginning of the month not one day has passed without a sell-off in USD/JPY. We are 9 trading days into the second month of the year and USD/JPY has fallen in each and every one of them. This weakness is mirrored in the Dollar Index, which dropped 8 out of the last 9 trading days or 12 out of the last 14 trading days. If that’s not the definition of a downtrend, we don’t know what is. The decline in the dollar is supported by the decline in Treasury yields, which have fallen from 2.27% at the beginning of January to a one-year low of 1.62%. The main reason why investors are selling dollars is because they no longer believe that the Federal Reserve will raise interest rates in 2016. What’s interesting is that Yellen did not say anything in her testimony over the past 2 days to suggest that would be the case. While we believe that the Fed will leave rates unchanged in March, the year is new and there’s still a reasonable chance that rates could be increased at the end of the year. Nonetheless, Fed fund futures are no longer pricing in a rate hike this year, validating the decline in the dollar.
As for the question of when the U.S. dollar will stop falling: it will happen when U.S. data is strong enough for investors to re-price tightening. Thursday morning’s better-than-expected jobless-claims report triggered a short-lived rally in the greenback that was erased almost as quickly as it was incurred. We’ve learned through the past few years that the focus for the Fed is on job growth and not job losses -- as long as jobless claims remain below 300k. Friday’s retail-sales report is very important because the Fed pointed to spending as an area of strength for the U.S. economy. Unfortunately, according to Johnson Redbook, same-store sales fell 0.5% in January. However wages accelerated so it’s a tough call. But either way, we don’t expect spending to be strong enough for the Fed to overlook the volatility in the financial markets and raise interest rates next month. Economists are only forecasting a 0.1% increase after the -0.1% drop at the end of last year. In fact we believe that the U.S. dollar remains a sell on rallies leading up to the March FOMC meeting. Then, depending on the central bank’s guidance, the greenback may have a chance of recovering if the dot-plot still forecasts more rate hikes in 2016.
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