Two indices suggest USD rally could struggle in coming months
A couple indices suggest that the US economy may have embarked on a period of slower growth and if that's the case that could have significant implications for the much anticipated rise in US interest rates and the USD rally.
However, in the short-term the focus will be on the US Non-Farm Payrolls and whether Greece makes a payment to the IMF on Friday. A strong NFP number will send more longs into USD, though if Greece somehow makes a payment the greenback may not be able to gain much ground versus the EUR.
But longer term two indicators do potentially point to a period of slowing US growth over H2. The first one is the Dow Transportation Index, which since mid-May has started to lag the wider Dow Jones Industrial Index. So why would that matter to currency markets?
Transport activity is usually a good barometer of the economy. If more people are traveling and more goods are being transported it's usually a sign that the economy is doing well. When transportation slows it's generally a warning that not all is well.
If the US economy is set to continue its recent spate of lethargic growth – then the much anticipated rise in US interest rates may not happen this year. If the stock market also reverses into a bear market that to could put the breaks on a US interest rate rise as the Fed tends to see it as a leading economic indicator.
EUR/USD – not giving in easily
A temporary blip or something more permanent?
The other index, which has been giving off warning signals recently is the Citi economic surprise index, which has been recording growth in the number of economic statistics, which have gone against expectations. That is they have disappointed. That to could suggest the US economy is losing some steam.
The strong USD may have had a bigger impact on the US economy than expected and the fall in oil prices may have hit harder than anticipated – possibly because US consumers may chose to save their windfall rather than spend it and therefore not offsetting damage to the previously booming US oil industry.
But what if there is a strong May NFP number on Friday? Over the last 12 months most of the numbers have been over 200,000 and later this week are expected to show about 230,000 new jobs created – a relatively healthy number.
But unemployment tends to be a lagging indicator, so a strong number doesn't necessarily mean all is well in the economy. Though the average weekly hours in manufacturing component is seen as a leading indicator.
It's too early to say whether the Citi and Dow transportation indices are signalling problems, the US economy may simply be taking a breather before revving up again in a few months time. But if those indices do continue to deteriorate it suggests that the dynamics that have been powering the USD – at least from the US side – are starting to look more shaky.
If that turns out to be the case and it significantly alters expectations over US interest rates, it could produce a rout in the USD, given that the currency has so many longs with high expectations for a continued rally.
By Justin Pugsley, Markets Analyst MahiFX