With a tumultuous start to 2019 there is a lot to be concerned about for traders. However, is a trend about to emerge for the dollar? We look at the outlook for forex, commodities and equities this week.
With elevated volatility, 2019 has got off to a choppy start. Risk appetite has been hit hard amidst global economic data continuing to go south, a profit warning for Apple and a flash crash in forex. Chinese economic data has been deteriorating recently, but both official and unofficial (Caixin) manufacturing PMIs moving into contraction is a real worry. With Eurozone PMIs slipping too, in the US, ISM data has its worst monthly deterioration since October 2008. Add in a 5% to 10% downward guidance on revenue for Apple, the implications for the global economy look increasingly dire. The Fed did little to acknowledge concerns last month, but now markets are calling the beginning of the next cutting cycle. The Fed still has two hikes pencilled in for 2019, but markets are having none of it, literally. With fears of US recession in 2020 growing; Fed Funds futures say that a rate cut is far more likely than a hike as the next move, whilst a 25bps cut is priced for Q2 2020. Yields have plummeted with bond markets definitely rattled. The US 10 year yield has fallen as much as 70 basis points in two months. With yield differentials looking far less positive, it is difficult to see the dollar performing well in this environment. Jerome Powell also suggested on Friday that the Fed would be more patient in rate hikes. There may be scope for a yield rebound should there be progress in the US China trade negotiations this week but it is unlikely that much of any note will come out until the towards the end of February. The dollar correction which we are predicting in 2019 could be ready to take hold.