Greenback remains in favour ahead of the Fed

Global markets will be back on Fed watch again this week with the March FOMC meeting set to take place. 

Source: Bloomberg

The moves in the USD have continued to dictate how the market feels US policy will play out and the gulf between the US and the rest of the world continues to grow. The greenback has tacked on significant ground, particularly against the euro where it continues to amass gains. This has helped the US dollar index to nudge through 100 for the first time since April 2003 and attention will be firmly on the Fed to see if this rally can continue.

This meeting will see the Fed update its economic and financial forecasts (summary of economic projections); and will also bring the dot plot analysis. These will be released along with the statement and the key here is whether the updated forecasts will give the Fed room to adjust its language regarding rates lift-off. Hawkish members such as Mr Bullard have suggested the Fed should remove the ‘patient’ reference at the March meeting. Some analysts expect the language to be adjusted so as to allow flexibility to raise interest rates sometime around the middle of the year.

The data dependence of the Fed’s approach is likely to provide the flexibility that it needs on policy going forward. While some have expressed concern about the impact of a firmer USD on the US economy, some of these fears may be overdone given the extra capacity being provided by weaker oil prices and stronger labour market. Whether international forces will have an impact or not on the Fed remains to be seen, but as long as domestic data is not impacted then I feel it’s unlikely.

China off to a strong start

While most global equity markets seem to be exercising some caution heading into the Fed meeting, China has been an exception as the Shanghai Composite rallied to its highest since 2009 and got off to a solid start to the week. It seems equities are being supported by some comments made by Chinese Premier Li Keqiang over the weekend. Premier Li suggested the country has plenty of capacity to deploy targeted stimulus measures if growth slows towards the bottom of the targeted range.

On Wednesday we receive China property price data and I don’t think many surprises will be expected from that data. However, it’ll be interesting to see if the PBoC’s recent cut to the lending rate will have an impact on housing activity, but given all other recent measures haven’t done much then perhaps this is blind optimism.

Iron ore prices have remained a thorn for the Australian economy and with China now content with slower growth, this is hardly a surprise. With the switch from being a mining-dependent economy to a domestic-demand driven one likely to take time, you can only feel rates have more to fall to achieve this and the AUD has further to fall.

AUD/USD is holding on to $0.7600 and the key release for the local currency this week will be the RBA minutes from the last meeting. After the decision to hold it seems the market is still expecting a very dovish set of minutes. Governor Glenn Stevens will then speak at a luncheon on Friday where he could give further insight on policy. Having said that, the gulf between US policy and Australia policy is only likely to widen should the two sets of policy updates play out in the way many are expecting. As a result, the smart money is likely to be looking for shorts in the pair on any strength.

DAX likely to lead Europe

Ahead of European trade, we are calling the major bourses firmer with the DAX seemingly poised to test 12,000 at some stage this week. The stars have certainly aligned for the DAX this year and the recent bout of weakness in the euro also seems to have worked a treat. Of course the ECB’s QE programme has played a big role particularly given the favourable parameters of the asset purchases. ECB President Mario Draghi speaks on the Future of the Finance Industry in Frankfurt and this could cause some volatility for the single currency. Apart from that we are in for a quiet start to the week on the economic calendar.

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