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USD Capitulation

The US dollar capitulation in the wake of the unexpectedly dovish FOMC release yesterday has seen commodity process surge overnight.

USD
Source: Bloomberg

The DXY dollar index lost another 1.1%. This dollar weakness has helped the USD-denominated pricing of iron ore, which gained 4.7% overnight. WTI oil is back above $40 for the first time since 7 December, fuelled by the dovish Fed, but also the positive DOE weekly release and expectations for the oil producer meeting in mid-April.

Materials and energy sectors are expected to lead the gains in the Asian session today, which bodes well for Chinese and Australian equity markets. BHP (+4.9%) and CBA’s (+3.7%) ADRs both performed very strongly overnight, showing that the ongoing low rates environment and falling market volatility are seeing strong buying in the high-yielding Aussie banks.

However, the poor performance of European equities overnight underlined some of the growing concerns of this weak-USD rally. It’s uncertain how much currency strength other countries will be willing to take. The Aussie dollar surged over US$0.76 to its highest level in nine months, which could hurt the growing services and tourism boom in the country, but also threatens the RBA’s inflation forecasts. The RBA emphasised that inflation is likely to be the main driver of any further rate cuts in their minutes released on Tuesday. The 0.9% drop in the DAX overnight appears to be largely due to concerns over exporters from the stronger Euro. And ahead of the Nikkei open we are calling the index down 0.5% after the yen rallied to its strongest level since October 2014. At these levels, it is hard to see the Bank of Japan not extending their stimulus program in some form at their 28 April meeting.

While some have been quite vocal and vituperative in their criticism of the Fed’s dovish turn, the JOLTS data released overnight have made clear that beneath the strong headline employment numbers there is still a lot of weakness in the US economy. While the Non-Farm Payrolls attracts the most attention from the markets, the JOLTS data are closely followed by the Fed and in particular the three key ratios of the vacancy rate, hiring rate and separation rate. While the vacancy rate continues at some of the highest levels seen since 2001, the hiring rate and separation are still very weak. The hiring rate collapsed to 3.5% in January, its lowest level since 2014, emphasising underlying weakness in the US labour market. The separation rate also fell back noticeably in January, after breaking out to 3.6% in December for the first time since 2009.

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