Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Profile

Caterpillar could be the Canary in the coal mine regarding US interest rates

On Thursday, Janet Yellen chairwoman of the Federal Reserve indicated that a rise in US interest rates is on for this year after all, possibly she’s trying to dispel fears that the expected September rate rise was not slated because of deep economic concerns. However, clues from the stock market are providing a good reason to believe a rate rise may not happen this year.

Yellen’s words gave USD a boost last week and this was supported by news of an upward revision to the US economy as it grew by a very robust 3.9% in Q2, compared with 3.7% expected by analysts.

Caterpillar could be the Canary in the coal mine regarding US interest rates

But USD bulls should be cautious over the coming months, even if this Friday’s jobs numbers do show growth above 200,000. Employment is lagging indicator.

Meanwhile, GDP numbers are backward looking. On the same day as Yellen was speaking US machinery giant Caterpillar announced plans to axe 10,000 jobs and talked about a bleak global outlook. Caterpillar is very impacted by the commodities crash, a strong USD and the Chinese slowdown.

Another big machinery maker, the UK’s JCB also made similar comments and announced redundancies. Indeed, a growing number of companies around the world are issuing profit warnings – not all of them in resources – and cite headwinds in the global economy.

Right now these canaries in the coal mine might provide a more reliable indicator on the direction of US interest rates over the next three to six months. If more big companies make redundancies, shut factories and slash investment then it will eventually trickle down to the wider economy, including the so far resilient US one.

But that’s not all. A number of central banks in developed countries, such as in Sweden and New Zealand, have all reversed earlier rate increases on the back of economic concerns.

 

Global conditions will influence Fed

The Fed has indicated that it’s watching global conditions and financial markets carefully and is concerned not to make them any worse. It probably doesn’t want to send USD soaring and further damage the competitiveness of US exporters – no country wants a strong currency these days.

For the moment the darkening outlook of the global economy points to the Fed standing pat on monetary policy. If it does raise interest rates it may soon have to cut them again like the other central banks.

For the moment the darkening outlook of the global economy points to the Fed standing pat on monetary policy. If it does raise interest rates it may soon have to cut them again like the other central banks.

It’s not clear yet if the world is going through a pause before picking up again or heading for something much more worrying, such as an emerging market debt crisis. The last thing the world would need under those circumstances is a strong USD and higher US interest rates.

A worsening global economic outlook would favour JPY with its safe haven status, particularly on fear spikes. Though any significant rise in JPY would be fought vigorously by the Bank of Japan. The Fed, meanwhile, is likely to veer on the side of caution as the current bout of nerves could last for the rest of this year if not beyond.

 

TECHNICAL ANALYSIS: USD/JPY – range bound, but ready to break-out

 

USD/JPY remain range bound as forex traders ponder whether recent volatility in global stock markets and concerns over global growth are a blip or the signs of something more worrying.

However, the Bollinger banks and the SD Indicator show a considerable fall in USD/JPY volatility and imply a break out could be on the cards soon. Given the increasingly ‘risk-off’ sentiment dominating markets that move will probably be downwards.

Nonetheless, a strong US jobs number could temporarily send the pair in the opposite direction as markets pencil in a US rate rise in December. But as stated in the comment on fundamentals, there’s a strong possibility that it won’t happen and that fear will remain the dominant sentiment, which in the short- to medium-term favours a stronger JPY as it’s safe haven status comes into play.

Levels below 118.00 could see USD/JPY head for 115-6.00. Levels about 122.00 would be a break-out on the upside.

 

By Justin Pugsley, Markets Analyst, MahiFX

Follow us on Twitter

comments powered by Disqus

Trader Stories

Latest Interviews

Statement on CHF market volatility

Business as usual for MahiFX despite Swiss franc movement

Full Interview

MahiFX does not provide investment advice or recommendations, and no material on this site should be construed as such. Opinions are those of the authors and not necessarily those of MahiFX, its officers or directors. MahiFX’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose some or all of your deposited funds.