The global growth pulse remains troubling, central bank policy is losing its potency and movements in the US dollar remain the key driver of broader market moves at present.
They were the three key lessons markets learnt last week according to Daniel Breen, FX strategist at ANZ, who cites a raft of weak PMI reports, a sharp reversal in the Japanese yen and amazing volatility in the US dollar to justify his call.
“The USD sits at the epicentre of all moves, and it is the momentum of US monetary policy, and of USD liquidity tightening, that will ultimately determine the path ahead for currencies,” wrote Breen in a research note released on Monday. “Last week, this was highlighted as primary moves in currencies were driven by the USD reaction to data, both weak and strong.”
The chart below, supplied by Breen, reveals the relationship between movements in the euro and Australian dollar over the past few weeks. While not quite in lock-step, the moves in both – courtesy of the dominance of the US dollar – were similar last week, a sharp divergence from the negative correlation seen in late January.
Looking ahead to the week ahead, Breen suggests that US data will need to show some improvement, and Fed chair Janet Yellen will need to say that nothing has changed for the US dollar, in order for the currency to regain its composure.
Yellen will deliver her semiannual monetary policy testimony to the US House Financial Services Committee on Wednesday (2am AEDT).
US retail sales and University of Michigan consumer sentiment will are also scheduled for release on Friday