Crunch Time For The US Dollar Bulls
It has been a meteoric rise in the USD these last few months, and one which is starting to surprise us to some degree, given the level of bearishness seen at the start of the year. Indeed, given much weaker levels going into February, it is no surprise to have seen the data taking a sharp turn for the better, with some contraction seen in the trade deficit, while domestic activity will have been bolstered by increased foreign demand based on price competitiveness.
Are we now to start seeing some of this unravel in the latest figures? We get the second reading of Q1 GDP which is unlikely to provide any surprises - and if any, may well be to the upside based on the above. However, the Goods Trade Balance for Apr is also due tomorrow where the market is expecting a widening in the deficit to back over $70bln ($71-71.5bln consensus), and this should start to make the market think on the level of USD appreciation in the time achieved. This has in no small part been exacerbated by the turnaround in EUR/USD based in the political woes in Italy, and no matter how much the coalition parties try to placate sentiment against perceived policy intentions, there is only one winner at the moment and that is the USD.
This will come at a price however, and the cracks may start to show tomorrow - and if not into the May data. We are in a climate of extremely changeable and selective global demand, and the market seems to have abandoned its sensitivity to exchange rate excesses, which central banks and governments have consistently highlighted. Indeed, it was not too long ago that Treasury Sec Mnuchin was chided for potentially influential comments on the USD, but naturally in light of what has developed since, this has long been forgotten.
In any case, these are trivial matters when considering the real economic impact of currency moves in the markets at present, and we can expect to see a weakening in the US data from Q2 if the USD continues to appreciate at the pace we are seeing now. Having mentioned EUR/USD, we get the CPI stats out of Europe later this week where exchange rate and energy price effects are expected to see headline CPI rise from 1.3% to 1.6%. This will cover the month of Apr, at the end of which the EUR rate had traded to a 1.2075 low. We have dropped another 5+ cents since, so the May reading will be of even greater interest, but projections from the Apr reading will be a natural impulse on its release this Thursday. Until then, Q1 GDP will the headline tomorrow, but the clues will be in the trade stats for last month.