How crucial is Yellen’s speech? And what about a Brexit referendum?
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.
The SNB reserves data
Benchmark interest-rate announced by the Reserve Bank of Australia
(Swiss National Bank)
currency Trade balance data from China Current-account data from Japan and Q1 growth figures Manufacturing and industrial production data – U.K.
Inflation data from China Trade balance data – U.K. Interest-rate decision - Reserve Bank of New Zealand
Consumer sentiment report - United States
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.