It’s all about the Dollar
In the often intertwined world that is the financial markets, where cause and effect can often be conveniently positioned based on one’s market thesis, we continue to contend that the value of the U.S. dollar is one of the most influential factors in determining asset class valuations. Thematically, there has been little change in what FX traders are most focused on in determining the value on the USD. Monetary policy divergence will likely remain a main driver of investor flows for the remainder of the year. However, the recent speed bumps in the U.S. economy, combined with the green shoots in Euro data, has given the market a reason to pause from its once hurried pace to get to parity on the EURUSD trade. In fact, ever since the more dovish Fed meeting in mid-March, we have seen the EURUSD touch the 1.10 level 6 times. While we maintain the bulk of the initial surge in the value of the Euro since the March 18th meeting. The move in rates has also followed a similar path, with the 10y pushing below 2% after the FOMC meeting and essentially remaining between 1.8% and 2% since then. Much of this change of heart was apparently confirmed by last Friday’s jobs report, which at +129 thousand was the lowest print since early 2013. While the knee jerk reaction from the weak employment report was to further reverse the divergence trade, both FX and rates have since retraced most of that initial move, and at times traded through the pre-non-farm levels. We are close enough to these pre-release levels to imply that any incremental impact from the report is largely moot at this point. This could be either because it plays into the Fed’s already downgraded view on the economy, and/or a large portion of the weakness is weather related and will be recaptured in the coming months. Since we don’t have another Fed meetings until the end of the month, and expect the other G-4 monetary meetings to mostly stay the course, we would expect a period of consolidation as most of shifting view of the pace of monetary policy divergence has been reflected by the changes in valuation over the past several weeks.