World markets themes for the week ahead

FOLLOWING are big themes likely to dominate thinking of investors and traders in the coming week and the Reuters stories related to them. Dollar juggernaut

The dollar has zipped to near two- year highs, leaving many scratching their heads. To many, it’s down to signs the US economy is chugging ahead while the rest of the world loses steam. After all, Wall Street is busily scaling new peaks day after day.

Never mind the cause, the effect is stark. The euro has tumbled to 22month lows against the dollar and investors are preparing for more, buying options to shield against further downside.

Emerging- market currencies are also in pain, with Turkish lira and Argentine peso both sharply weaker.

Now US data need to keep surprising on the upside or even just meet expectations. The International Monetary Fund sees US growth at 2.3 per cent this year. For Germany, the forecast is 0.8 per cent.

The US economy’s rude health has given rise to speculation the Fed might resume raising interest rates. Unlikely. But as other countries — Canada, Sweden and Australia are the latest — hint at more policy easing, there seems to be one way the dollar can go. Up. Heisei to reiwa

The coming week ends three decades of Japan’s Heisei era. Heisei, or Achieving Peace, began in 1989 near the peak of a massive stock market bubble and closes with the country trapped in low growth, no inflation, and negative interest rates.

The new era that dawns on May 1 is called Reiwa, meaning Beautiful Harmony. It begins when Crown Prince Naruhito ascends the Chrysanthemum Throne.

But do investors really want harmony? What they want to see is a bit of economic growth and inflation to shake up the status quo.

The Bank of Japan’s stimulus toolkit to revive a long-suffering economy is anything but harmonious and yet it’s set to stay.

The central bank confirmed recently rates will stay near zero for a long time. But the coming days may not be harmonious or peaceful for currency markets.

A 10-day Golden Week holiday kicks off on April 29 and investors are fretting over the risk of a “flash crash” - a violent currency spasm that can occur in times of thin trading turnover.

The year has already seen two yen spikes and many, including Japan’s housewife-trader brigade - so-called Mrs Watanabes - appear to have bought yen as the holiday approaches.

Their short dollar/ long yen positions recently reached record highs, stock exchange data showed. Fed: Up or down?

Wall Street is near record highs and recession worries are receding, so as we mentioned above, investors might wonder if the Federal Reserve will start raising rates again.

Such a pivot is unlikely after the Fed killed off rate-rise expectations at its March meeting. And the latest Reuters poll all but puts to bed any risk of rates will go up this economic cycle, given inflation remains below the Fed’s alarm threshold and unemployment is the lowest in generations.

Before the March rate- pause announcement, a preponderance of economists penciled in one or more increases this year. But that has flipped.

A majority of those surveyed April 22 to 24 see no further tightening through December and more are leaning toward a cut by the end of next year.

Indeed, interest rate futures imply Fed Funds will be below the current 2.25 to 2.50 per cent target range by this December.

Recent positive consumer spending and exports data have eased market concerns of a sharp economic slowdown. But inflation probably needs to run hot for a long period to panic policymakers off their wait- and- see course. — Reuters