From now on, it will cost to short the buck
Despite the lack of news on both the political and economic sides, the US dollar erased almost completely last week losses, which sent the Dollar Index down to 88.25 – another multi-year low. The buck started the week on a solid footing even though US investors were off for President’s Day. Since then, the greenback kept grinding higher supported by rising US rates, especially on the short-end of the yield curve. Indeed, the US 2-year Treasury yield inched higher to 2.25% amid rising inflation expectations; the 2-year breakeven inflation hit 2.03%.
Looking at interest rate differentials, one observes that US rates are rising faster than its G10 peers. For the FX market, this has immediate consequences, as forward points on AUD/USD are now positive (beyond 2 months maturity). This is the first time since March 2001 that 1-year forward points moved above the neutral threshold. It will now cost around 20bps per year to go long AUD against USD. The situation is almost similar with the New Zealand dollar. 1-year forwards points are not in positive territory yet, but are about to cross the line.
The implication of this new situation are significant for investors. From now, it will cost investors to go short USD against those currencies and it could really act as a disincentive for investors to speculate on a weaker dollar. In other word, this new set-up up should benefit the greenback.
The agenda is quite light today. However, traders will be watching closely the minutes of the January FOMC meeting, looking for clue regarding the Fed rate path. The statement released on January 31st was considered as slightly hawkish. It will therefore be the opportunity to validate this point of view. We believe those minutes won’t have a big a big impact on market, as trades have already priced in a March rate hike. The market will have to wait until then to get updated forecast. This could be a game changer, especially if Fed members revised to the upside the number of rate hike for 2018.
German market expectations are better than expected
German investor opinion remains optimistic despite political turmoil according to yesterday’s published economic data from economic institute ZEW and German Federal Statistic Office. The February ZEW Survey Expectations index came out at 17.80 (consensus: 16) against 20.4 for January, in line with December numbers amounting to 17.40. January Producer Price Index Y/Y was announced at 2.10% (consensus: 1.80%) against 2.30% the previous month, maintained at a high rate.
Political uncertainty remains around the German “GroKo” coalition that is supposed to be extended by Social-Democratic party (SPD) adherents on March 4th according to recent surveys anticipating a 60% support according to a survey from German Funke media group. In the case of a “no”, new elections would take place and new elections would probably occur, strengthening right extreme party “Alternative for Germany” (AfD) at the cost of SPD. The likelihood remains however slim, confirming our view that Germany remains in a positive growth setting, boosted by strong economic exports (December trade balance at EUR 18.20 billion) and sharp private consumption (January Consumer Price Index Y/Y at 1.60%, above 2 years’ average written at 1.10%), backing further improvement for the coming six months.
Yesterday the German DAX closed at 12’488 (+0.83%), supported by Materials (+1.44%), Utilities (+1.24%), Industrials (+1.12%) and Information Technology (+1.10%) while German 10-year Bund remained stable at 0.735%.
