Dollar Advances Alongside Equities as Market Debates September Taper : The positive correlation between the US dollar and S&P 500 is solidifying again – which is a disappointing sign for those looking for an extended and momentous advance for the currency. It is absolutely possible that both the safe haven currency and sentiment-tied benchmark equity index can rise in tandem, but such a climb would be slow and choppy for both. Feeding stocks just off record highs as economic growth maintains a lackluster pace, earnings growth forecasts fade and cheap money evaporates is extraordinarily improbable – borderline impossible. The alternative would be a wave of ‘sidelined’ capital returning to the capital markets. To assume that that will / must happen with asset prices still near record highs falls into the category of ‘hope’. A deleveraging is likely inevitable, and that will no doubt usher a break of the positive correlation and spur the dollar to a much more prolific and momentous climb. Switching from the big picture to the more immediate tides behind the greenback, the market was once again focusing in on speculation surrounding the ‘Taper’ time frame. There were two explicit highlights for market participants to work with. The first quarter GDP figure proved the source of a considerable debate. Though a ‘final’ reading – second update with more data following the flash reading – the sizable reduction from a 2.4 percent to 1.8 percent pace of expansion does stir concern. Personal consumption’s 0.8 percentage point slip to 2.6 percent was the principle catalyst for the general slowdown. Weaker growth can be interpreted as reducing the probability that the Fed will reduce its monthly QE purchases from $85 to $65 billion at the September meeting – the current consensus amongst economists – but not by much. The same taper delay / risk booster / dollar weight can be drawn out of Minneapolis Fed President Kocherlakota’s comments this past session. A dovish non-voter, the central banker repeated his lament that the market’s reactions to the Fed warnings were ‘outsized’ and that dates shouldn’t be given on QE. In contrast, Richmond Fed President Lacker – a hawkish non-voter – said he would be “fine with tapering it off right now”. This is a balance of commentary that seems to support a general believe – that pumping the breaks in September seems to be the outcome FOMC members expect as well. In the upcoming US session, we will see the Fed headlines actually increase. On deck, we have Dudley (voter), Powell (voter) and Lockheart (non-voter). Pay particularly attention to the voters. Also, a 7-year Treasury auction is scheduled. The 5-year sale this past session met its lowest demand since August 2009. QE has plenty of influence on speculation alone.
Posted on: Thu, 27 Jun 2013 09:43:55 +0000
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