25 May 2015
Will fundamentals support Dollar’s recovery? – BBH
FXStreet (Barcelona) - The Brown Brothers Harriman Team previews the US Q1 GDP and Durable Goods Orders release, and view that the Dollar’s upside recovery might lack the support from these fundamental data releases.
Key Quotes
“The US dollar's recovery last week may not get the kind of fundamental support that medium and long-term investors would like to see to raise the confidence that the two-month correction has run its course. US Q1 GDP is likely to be revised sharply lower, given a greater deterioration of net exports and a smaller than expected inventory build. The 0.2% expansion may turn into a 0.8-1.0% contraction. Although it is backward looking, especially given that the second quarter is two-thirds when the revision is announced, it does have an important implication.”
“This means that rather than raise rates in June, as many of us had previously anticipated, the Federal Reserve will have to cut its GDP growth forecast for the entire year.”
“In March, the Fed's central tendency forecast, which excludes the three highest and three lowest forecasts was 2.3%-2.7%. It is possible that growth in the first half is flat or barely positive. This means that even if growth in the second half averages 3%, GDP for the entire year would be about 1.5%. To reach the current Fed forecast, the economy would have to expand by close to 5% in H2.”
“The projection for growth in the current quarter could edge higher if the details of the April durable goods orders report on May 26 are firmer. The headline activity may slip on the back of lower aircraft orders. Boeing reported its April orders slipped to 37 from 39 in March. However, orders, excluding defense and aircraft and shipments of the same, which are inputs for capex and GDP forecasts, should both be above Q1 averages.”
Key Quotes
“The US dollar's recovery last week may not get the kind of fundamental support that medium and long-term investors would like to see to raise the confidence that the two-month correction has run its course. US Q1 GDP is likely to be revised sharply lower, given a greater deterioration of net exports and a smaller than expected inventory build. The 0.2% expansion may turn into a 0.8-1.0% contraction. Although it is backward looking, especially given that the second quarter is two-thirds when the revision is announced, it does have an important implication.”
“This means that rather than raise rates in June, as many of us had previously anticipated, the Federal Reserve will have to cut its GDP growth forecast for the entire year.”
“In March, the Fed's central tendency forecast, which excludes the three highest and three lowest forecasts was 2.3%-2.7%. It is possible that growth in the first half is flat or barely positive. This means that even if growth in the second half averages 3%, GDP for the entire year would be about 1.5%. To reach the current Fed forecast, the economy would have to expand by close to 5% in H2.”
“The projection for growth in the current quarter could edge higher if the details of the April durable goods orders report on May 26 are firmer. The headline activity may slip on the back of lower aircraft orders. Boeing reported its April orders slipped to 37 from 39 in March. However, orders, excluding defense and aircraft and shipments of the same, which are inputs for capex and GDP forecasts, should both be above Q1 averages.”