How cru­cial is Yellen’s speech? And what about a Brexit ref­er­en­dum?

Financial Mirror (Cyprus) - - FRONT PAGE -

The week end­ing Fri­day, June 3, was a wretched one for the USD. The US dol­lar in­dex, de­nom­i­nated by DXY in the fi­nan­cial mar­kets plunged to 94.029 from a day’s high of 95.638. For the year to date, the US dol­lar in­dex has de­clined by 4.67%. It has a 52-week trad­ing range of 100.510 on the high-end and 91.919 on the low end. The US dol­lar in­dex tracks the per­for­mance of the green­back against a bas­ket of cur­ren­cies in a trade-weighted man­ner. The EUR ac­counts for a 57.6% weight, the JPY has a 13.6% weight, the GBP has an 11.9% weight, the CAD has a 9.1% weight, the SEK has a 4.2% weight and the CHF has a 3.6% weight.

While this is by no means an all-en­com­pass­ing mea­sure of the dol­lar strength or weak­ness against all cur­ren­cies, it gives a fairly ac­cu­rate in­di­ca­tion of the over­all strength or weak­ness of the green­back. Any fac­tors that are likely to strengthen the dol­lar will nat­u­rally boost the DXY. And in much the same way, fac­tors that are likely to weaken the USD will cause the DXY to plunge.

This week is cru­cial to the per­for­mance of the USD and cur­rency trad­ing in gen­eral es­pe­cially for short-term gains. Janet Yellen, the Fed chair, is mak­ing a speech to the World Af­fairs Coun­cil in Philadel­phia, Penn­syl­va­nia. This is a fore­run­ner to the June 14-15 FOMC meet­ing which is go­ing to re­lease a de­ci­sion on the fed­eral funds rate.

Presently, the FFR is trad­ing in the range of 0.25%-0.50%. Con­di­tions in the US econ­omy were largely pos­i­tive over­all head­ing into the June meet­ing. How­ever, the re­cent re­lease of em­ploy­ment data from the US Labour De­part­ment proved none too con­vinc­ing. The to­tal num­ber of new jobs added to non­farm pay­rolls in the US num­bered just 38,000 in May. This was a sharp dis­ap­point­ment from the of­fi­cial fore­casts of an­a­lysts of 160,000. As a re­sult of these de­clines, con­fi­dence in the per­for­mance of the US econ­omy has dipped and traders sold the USD en masse.

De­pend­ing on which mea­sure for the United States dol­lar in­dex one is us­ing, the size of the de­clines will vary. From June 2015 to June 2016, the DXY dropped from 95.46 to its cur­rent level of 93.87. This rep­re­sents a 1.66% fall. The in­dex hit its low point back in 2008 when it was at 71.32. By Fri­day, June 3, the USD was weaker against a bas­ket of cur­ren­cies in­clud­ing the fol­low­ing major pairs: - AUD/USD at 0.73660 up 1.966% on the day - EUR/USD at 1.13620 up 1.883% on the day - USD/CAD at 1.29450 down 1.183% on the day - USD/RUB at 65.30470 down 2.165% on the day - USD/CHF at 0.97615 down 1.434% on the day - USD/JPY at 106.63500 down 2.053% on the day These cur­rency cross ex­change rates in­di­cate that the dol­lar has weak­ened in all in­stances against its trad­ing pair. The May non-farm pay­rolls num­bers were of con­cern to an­a­lysts, de­spite the Ver­i­zon num­bers which skewed the pic­ture slightly. Even when the 35,000 jobs are taken into ac­count at Ver­i­zon (given the strike), the short­fall from the an­a­lysts’ pro­jec­tions of 160,000 jobs be­ing added in non­farm pay­rolls in May is still 73,000. That April fig­ures were re­vised down­wards to 123,000 from an ini­tial fore­cast of 160,000 is also of con­cern.

All in­di­ca­tions about a June rate hike tak­ing place are di­min­ish­ing by the minute. The im­plied prob­a­bil­ity of a 0.75% in­ter­est rate on June 15 is now just 3.8%, with a 96.3% like­li­hood of the in­ter­est-rate re­main­ing 0.50%. For July 27, the like­li­hood of a 0.75% in­ter­est rate is 30.2%, while that of a 0.50% in­ter­est rate is 68.7%.

Fur­ther ahead, the Septem­ber 21 in­ter­est-rate de­ci­sion has an im­plied prob­a­bil­ity of 39.5% for a 0.75% in­ter­est rate, while the like­li­hood of a 0.50% in­ter­est rate is just 52.2%. As we pro­ject fur­ther into the year, the pos­si­bil­ity of a rate hike in­creases.

Tuesday

The SNB re­serves data

Bench­mark in­ter­est-rate an­nounced by the Re­serve Bank of Aus­tralia

(Swiss Na­tional Bank)

Wed­nes­day

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for­eign

cur­rency Trade bal­ance data from China Cur­rent-ac­count data from Japan and Q1 growth fig­ures Man­u­fac­tur­ing and in­dus­trial pro­duc­tion data – U.K.

Thurs­day

In­fla­tion data from China Trade bal­ance data – U.K. In­ter­est-rate de­ci­sion - Re­serve Bank of New Zealand

Fri­day

Con­sumer sen­ti­ment re­port - United States

Monthly Canada

em­ploy­ment

re­port

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These are but a hand­ful of the many im­por­tant eco­nomic an­nounce­ments to be re­leased this week, and it should be re­mem­bered that China will have sev­eral days of hol­i­days be­tween June 6 and 10. It is clear that the pay­rolls data from May is ev­i­dence enough that there is a slow­down in the US econ­omy. In the United States, var­i­ous other fac­tors will also be weigh­ing on the minds of in­vestors, in­clud­ing the pres­i­den­tial pri­maries tak­ing place in New Mex­ico, Cal­i­for­nia, New Jersey and Mon­tana.

Ver­mont Sen. Bernie San­ders is go­ing head-to-head against Hil­lary Clin­ton and there are some 475 del­e­gates cur­rently up for grabs. Ac­cord­ing to Real Clear Pol­i­tics, sig­na­ture state Hil­lary Clin­ton edges ahead of Don­ald Trump by just 1.5%. It is also ev­i­dent that the weak­ness in the econ­omy has given out­siders like Trump and San­ders an edge over Clin­ton. The fall­out from weak jobs num­bers comes largely from in­di­vid­u­als with­out col­lege de­grees, and those are the folks sup­port­ing Don­ald Trump. For ex­am­ple, job­seek­ers with high school diplo­mas num­ber 3 mil­lion less than they did a decade ago, while 7 mil­lion jobs that have been added over the past decade be­long to peo­ple with col­lege ex­pe­ri­ence.

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