Clouds are gathering over the American economy. However, when the US dollar is seemingly cornered, it gets an unexpected helper. The growth of stock indexes after disappointing statistics on private sector employment from ADP stopped the “bulls” rushing to attack the EURUSD.
The Fed’s high interest rates against the background of the volatility-reducing shutdown have turned the US dollar into a risky currency that is highly effective in carry trade operations. In addition, Deutsche Bank estimates that 80% of non-residents’ transactions with American stocks are hedged. The indicator is at historically high levels. As a result, the S&P 500 rally attracts capital to the United States without selling greenbacks as part of currency risk insurance. EURUSD falls when stock indexes rise.
The euro jumped above $1.16 due to disappointing private sector employment statistics. The four-week average dropped to 11.25 thousand by October 25. At the same time, ADP noted that the labor market is struggling to create new jobs. Goldman Sachs predicts their reduction by 50 thousand in October, data from other alternative sources is disappointing, and 71% of Americans in a survey by the University of Michigan expect an increase in unemployment. This is an anti-record from the beginning of accounting in 2013.
If we add to this the negative impact of the shutdown on the US economy, we could call the dollar’s situation hopeless. According to estimates by the Congressional Budget Office, a government shutdown will reduce GDP by 1.5 percentage points in the fourth quarter. Oxford Economics calls the figure at 1 percentage point.
Nevertheless, the greenback remains stable. Markets have only marginally increased the chances of the Fed’s monetary policy easing after the unimpressive data from ADP. The indicator ranges from 62-67%. Do investors believe that the central bank will not focus on alternative sources, but will wait for official statistics?
The split within the FOMC is getting deeper. It was he who forced Jerome Powell to question the market’s belief in a federal funds rate cut in December. “Pigeons” adhere to the mantra about the weakness of the labor market, but do not have reliable data to confirm this. The hawks point to the strength of consumer spending, still high inflation, and insist on a pause.
In such a situation, the best solution would be to ease monetary policy in December with a pause signal in January. Unless, of course, the new data makes adjustments.
