Largely status quo with leading currencies and US equities petering out.
Flat March is fuel for bulls
Markets were little changed in March, with the currency majors and United States equity markets losing a bit of steam.
Instead we noticed a limp closing to the month, with the euro failing to hit its goal of 1.40 against the US dollar and the British pound failing to progress to 1.70.
At the start of last month, developments from Crimea overshadowed markets and cast a strong risk-averse shadow, which kept the US dollar in demand. However, most of these gains were lost after a more-than-hawkish Federal Open Market Committee rate decision in mid-March, which caused the dollar to pare its gains from earlier in the month.
The Fed chair, Janet Yellen, was more hawkish than expected during her testimony. One of the notable differences was the adoption of a wider range of data for future guidance policy. The Fed under Ben Bernanke had targeted a 6.5 per cent unemployment threshold as a target to determine future Fed policy.
With February’s US non-farm payroll report showing an unemployment rate of 6.7 per cent, Ms Yellen instead broadened the range of data the FOMC will use to determine future Fed policy action instead of solely focusing on US labour market data.
The Fed was also very detailed on future interest rates, with the rate expected to be closer to 1 per cent through next year. Current rates were kept at 0.25 per cent, while the pace of asset purchases was dropped by another US$10 billion to a revised $55bn per month. The purchase of mortgage-backed securities was cut by $5bn to a revised $25bn, while treasury purchases were scaled back by $5bn to a revised $30bn.
The Fed’s decision to use a broader array of market data as opposed to solely focusing on the condition of the labour market will de-emphasise the importance of today’s non-farm payroll report – although volatility is set to remain high. February’s report showed that 175,000 new jobs were added in the US, with the unemployment rate ticking up to 6.7 per cent. Expectations for March are for gains of 206,000, with the rate dropping back to 6.6 per cent. However, once again the participation rate will be a more accurate barometer to judge the overall unemployment rate.
The broader range of data from March will inspire US bulls, as the data has been positive. Industrial production and manufacturing data from the US were slow, albeit showing signs of improvement over February. Inflation dropped to 1.1 per cent from a previous reading of 1.6 per cent. US annualised fourth-quarter GDP came in at a solid 2.6 per cent, below expectations but higher than the previous month’s reading of 2.4 per cent.
Perhaps the most interesting piece of data from the US this past month was the net long-term treasury international capital (Tic) flows data, which measures the amount of investment inflows into US bond and equity markets compared to the outflows to foreign bond and equity markets. The data collected from January showed that there was a $7.3bn increase in investments into US markets, compared to December, when about $45.9bn left American shores for foreign markets.
This rise in investments in the US not only shows more confidence in the US markets, but an increase in demand for US assets will naturally keep the demand for the dollar elevated to make these purchases. As long as the Tic data remains positive, more money is flowing into the US on the back of safe haven demand.
The Indian rupee put on a strong performance in March, gaining more than 3 per cent against the dollar to close the month below the all-important psychological level of 60. The rupee has gone through a bit of a renaissance, as improving political developments in the lead- up to May’s general elections have improved the prospects for the Indian economy.
With exit polls showing a strong turnout for the Modi-led BJP, the prospects for the Indian markets and the rupee will continue to improve through the month ahead. Data from India this past month has also improved prospects for the rupee. Dips in consumer price pressures (the inflation rate fell to 8.1 per cent, down from 8.79 per cent) while industrial production figures and manufacturing purchasing index data recorded slight gains have also brought optimism to Indian markets.
With inflation at a 25-month low and near the Reserve Bank of India’s target rate and the rupee making a recovery, the RBI held rates unchanged at 8.00 per cent as expected when it met on Tuesday. The rupee has rallied more than 5 per cent against the dollar in the past two months, and the gains are set to continue. We expect to see a strong showing of 58.40 against the dollar in the weeks ahead. However, the volatility will be high through the elections next month.
Gaurav Kashyap is the head of futures at Alpari ME