The question being asked after the weaker-than-expected U.S. September employment report, where it was difficult to find any silver lining in the data, is whether a slowing economy signals a reversal in the dollar. The rationale behind forecasts for a stronger dollar has been divergence in monetary policy between the Fed and other central banks (UK excluded). With expectations of a Fed liftoff pushed out to next year, one part of this argument is no longer valid. However, this shifts the onus to other central banks to ease policy amid global growth concerns and stubbornly low inflation.
In this regard, attention is on the Bank of Japan and the ECB amid speculation that one or both of these central banks could ease monetary policy. The Bank of Japan meets on Wednesday, ECB President Draghi speaks on Tuesday although the topic of his speech is non-market related and minutes from the September ECB meeting are due to be released on Thursday. While easing talk by these central banks seems premature, markets will be very sensitive to any hints that such are being considered. There has been speculation that the Bank of Japan could ease further at its October 30 policy board meeting.
So, is the US dollar in for a reversal or a continuation of choppy price action within existing ranges? Much will probably depend on how equity markets perform as they have been a driver of the currency market. In this regard, there remains a strong correlation between equities and currencies, with both the JPY and EUR tending to gain when stocks sell off and vice versa when stocks firm.
In any case, the risk of easing by other central banks should counterbalance the shift in Fed liftoff expectations, which will keep markets hyper sensitive to economic data. In this regard, also keep an eye on whether there has been a shift in equity markets from good news is bad news (i.e. Fed rate hike is bearish for stocks) to bad news is good news (i.e. no Fed rate hike is positive for stocks) given the way equities recovered after the initial shock selloff on the weaker jobs report.
What is for sure is to expect more volatility with currencies likely stay within existing ranges for the time being. The risk to this view lies with other central banks (e.g. BoJ, ECB) if they choose to ease policy, which would weaken their currencies.
Jay Meisler, founder
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.