By William Doody
The U.S. Dollar is expected to continue its recent declines as corporate earnings reports give traders hope that an economic recovery is starting to take hold. The majority of companies reporting over the past several weeks have beaten estimates for bottom-line results, mostly due to significant cost-cutting over the past year. Still, equity markets have been heartened by the news and the benchmark Dow Jones Industrial Average pushed above 9000 for the first time since January. The strength in equities has accelerated the decline in the Dollar, as currency traders have rushed out of “safe-haven” bets and entered higher yielding positions. While world equity markets are certainly due for a mild correction after their recent gains – and thus a return to favor for the safe-haven Dollar and Japanese Yen – a number of analysts have recently upped their year-end forecasts for equities. If these predictions play out, then further weakness can be expected for the Dollar.
This week, important economic releases will include U.S. consumer confidence data on Tuesday, durable goods data and the Federal Reserve’s “Beige Book” of economic data on Wednesday, and Q2 GDP estimates on Friday. The July consumer confidence data is expected to come in relatively stable versus June’s reading. Further declines in consumer confidence would be devastating for equities and a positive for the Dollar (on a flight-to-safety basis) as this would suggest that the potential economic recovery may not fully materialize in the near future. Consumer spending remains tepid at best and that trend will not reverse without improvement in consumer sentiment. Meanwhile, durable goods orders for June are expected to have declined by 0.8% compared to an increase of 1.8% posted in May. A positive surprise here is certainly a possibility, as some corporate earnings reports have suggested a strengthening of business during June. Such a surprise would contribute to additional declines for the Dollar and strength for equities. Finally, Q2 GDP estimates on Friday must show improvement over the 5.50% annualized contraction reported in Q1 if equities have any hope of continuing their recent rally. A worse-than-expected GDP number could sharply reverse the recent trend for the Dollar.
Moving into the week, we would open a short-term position long the Dollar. Equity markets are overdue for a rest and we see more likelihood of negative surprises in the week’s economic data than positive ones. Both of these factors would be short-term positives for the Dollar.