The dollar is not in the best condition as it approaches the key to the fall meeting of the Fed. Despite the fact that one of the burning issues has been resolved in a positive way, namely the question of the level of public debt, which automatically removes the likelihood of a government default, a number of indirect factors indicate still serious problems in the american economy.
The current account deficit has reached $ 123 billion in the 2nd quarter. This is the maximum value since 2008. The growth in the deficit compared to the 1st quarter was 8.5%. In all of the main components, namely investment income, net transfers, the difference between imports and exports, the results were worse than expected.
The U.S. Treasury has published a further report on the influx of foreign capital. The inflows in the last 12 months inclusive of July remained positive. However, a sharp decline of 3-month low has been recorded. It is obvious that «Trumpanomics» is not inspired investors. The restoration of investment in the stock market, which has been marked since the month of February, has slowed sharply. Investments in Treasury bills And Notes remained in negative territory. In addition, the total inflow has a tendency to slow down, which is clearly visible in the graph below. Each peak of activity, if you count from the peak reached in October 2010, during the «post-crisis» period, which is lower than the previous one.
The simultaneous decrease in the growth rate of the collection of taxes, which are significantly lagging behind the growth of GDP, clearly indicate that the entire growth of the u.s. economy, at the current step is formed due to the exceeds the growth of the debt. Debt at all levels (federal to municipal) are growing faster than the economy. And the debts of households (consumption, mortgage, education, etc) grow faster than income.
The branching point for the regulator is to the approach. The market needs to understand if he always has a plan for the reform of the economy that will reverse the negative trend, or if there is a plan with no chance of that happening, or if there is no plan at all.
There are three possible scenarios for the market reaction from the extent to which the results of the meeting meet the expectations of the market.
The main scenario, from which the players proceed at the present time, seems to be positive. On the whole spectrum of the g-10 countries, there has been an increase in the stock indexes and bond yields, which indicates the start of the capital debt market. Price of gold fell to a monthly low. The oil, on the contrary, almost near the maximum of the year. The market expects the macro-economic forecast will not be aggravated, and Fed Chairman Yellen will finally announce the beginning of the reduction of the balance sheet. The text of the final declaration expected to be more severe, which will increase the chances that in December, the Fed will once again raise the rates and not out of his own schedule.
The dollar, in case of fulfilment of the expectations of the market, will show the trend to grow, especially against the defensive assets like the yen, the swiss franc and even the euro.
If the outlook turns out to be more positive, and the speech of Yellen is more militant, while the market may adopt a global turn in the dollar, of the completion of the current phase of weakness, which lasted from January.
And only if market expectations are not justified, only in this case, the dollar reacted with a decrease.
The balance sheet is rather unstable. We have already mentioned that the financial conditions for the company not to look too attractive. A rate increase may cause the opposite effect. The dollar, after the period of high volatility, it does not find the strength to grow.
Thus, we must start from the fact that the Fed meeting is a key event, but not the only one. The markets will wait for tax reform, which will put everything in its place.