US dollar rally trimmed alongside growth expectations

May 14, 2015

Frankfurt (May 14)  The bad news around the United States economy is chipping away at the huge rally in the US dollar and resetting expectations about the course of growth in the US this year.

The latest event - poor retail sales for April - has reduced expectations around second-quarter growth after a sharply worse rate of output in the first quarter of 0.2 per cent. There is a real possibility that number could even be revised to a contractionary one in future estimates.

The US figures even make Europe look good, given growth in the euro area was 0.4 per cent during the same period, it emerged on Wednesday.

The significance of a downturn in US growth, and a stalling of the recovery, is that it might delay the timing of an interest rate hike in the world's biggest economy - the first of its kind in the US since the financial crisis. It could also mean that expectations around the Federal Reserve's tightening schedule have to be pared back if the pattern of mixed data extends to the labour market, where jobs growth has held up reasonably well except for in March. Jobs growth in April rebounded,  with more than 200,000 positions created.

This has left financial markets second-guessing the rally in the US dollar in anticipation of rate hikes and, for economies like Australia's, unfavourable currency trends are re-emerging as the greenback gives back some of its gains.

RBC reduced its US gross domestic product forecast from 4 per cent to 3.6 per cent. The Atlanta branch of the Federal Reserve, which maintains a real-time estimate of US growth, shows an outcome of 0.7 per cent for the second quarter, annualised, down one-tenth of a percentage point. Consensus for second-quarter growth stands at 3.1 per cent according to Westpac, although it is still only one-and-a-half months in.

Foreign exchange experts say that investors had found themselves in extreme long positions in the US dollar as the rally played out. Some of the price action being seen now is those positions becoming unwound.

National Australia Bank senior currency strategist Emma Lawson said: "I'm not sure I would go so far to say that it was overcooked."

The greenback has been in recovery mode, adding 23 per cent on a trade-weighted basis since July 2014 through to its peak in March. "Also on the flipside of that, given currencies are relative, the QE [quantitative easing] taken by the Bank of Japan and the ECB [European Central Bank] does support the US dollar," she added referring to the monetary stimulus depressing the Japanese yen and the euro.

From March, the greenback has still wiped out only around 5 per cent.

 "It hasn't unwound all of the gains and you still have a global environment where some very major central banks are easing," Ms Lawson said, characterising the US data as "a little bit mixed instead of terrible".

"Even in [Wednesday's] retail sales numbers there were upward revisions to previous numbers," and it was possible that some of the poorer statistics could be attributed to the winter cold snap, she added.

"[The Fed] tell us each meeting is live and it's data dependent ... they will be going from data point to data point."

NAB reduced its Australian dollar forecast a few weeks ago to US78¢ for June 2015, accounting for some of the US dollar retreat. The Australian currency was fetching US81.28¢ on Thursday.


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