Up, Up and Away - USD was the top performer last week

 

 

 

The USD was the top performer last week thanks to Friday’s U.S. non-farm payroll and developments elsewhere. The global monetary easing parade continued last week with surprise interest rate cuts from the central banks of China, India and Poland. Not to be left out, the European Central Bank announced that it will begin buying bonds (QE) on March 9th. This reinforces the dominant factor behind USD strength, which is the divergent direction of monetary policy guidance from the Fed and the policy outlook for many other central banks.

 

However, the USD powered higher against a broad cross-section of other currencies after Friday’s non-farm payrolls report as market participants are convinced more than ever that the U.S. Federal Reserve will raise interest rates in June. The 1.5% fall in the Dow tells us that equity investors are also convinced that the Fed is going to hike rates and are expecting the Fed to drop the word "patience" from its forward guidance at the next FOMC meeting on March 18th.

But before we all take for granted that the Fed is going to hike rates in June let’s pretend that we are Fed economists. Any economist worth her pay will tell you the following: based on the relative strength of the U.S. economy the Fed is in a position to raise interest rates, but on the other hand. Oh yes, the famous other hand. To be fair that hand has been weighed down by multiple economic data points that have missed expectation since the beginning of February...