Strong dollar weighs on commodities and US futures

It’s been a fairly quiet start to the trading session on Tuesday and yet we are seeing some decent moves in the markets with major European indices down around two thirds of one percent and Brent crude off by more than one percent.

While there has been some data released this morning, it hasn’t exactly been big news and it is almost always completely ignored by traders. With detailed Greek talks now taking place tomorrow after an unsuccessful attempt yesterday, and those also likely to yield very little, traders have been left to mull over all of the information received last week and apparently they are united on the message, the dollar is king.

It’s not breaking news that the Fed is almost guaranteed to be the first to hike interest rates, or that the first hike is likely to come in June or September this year. Friday’s jobs report once again highlighted the strength in the US economy as it battled through bad weather and large lay-offs in the oil industry to create 295,000 jobs in February, bringing the unemployment rate back to 5.5%, within the range that the Fed deems full employment. Not a bad effort at all.

The only concerning aspect was the lack of wage growth which appears to remain stagnant around the 2% level, which isn’t bad but it’s below what the Fed would like to see. And the fact that we’re seeing no acceleration is going to be a minor concern which is what I believe will push the Fed to hold off until September before it hikes interest rates.

Regardless of whether the Fed hikes in June or September, it’s coming and it’s not very far away. That makes the dollar very strong compared to its peers, even sterling which is in a similar position with the Bank of England seen raising rates later this year. Today’s rally in the dollar has weighed on commodities as a stronger dollar makes them more expensive when priced in other currencies.

Oil seems particularly susceptible to these dollar rallies at the moment as it appears to be trading near the upper end of its recent trading range and near the upper end of the range that many market participants envisage it trading for the majority of this year. Brent crude may run into support as the day goes on around $57 with this having done so in the past. If it breaks through here then we could see $54.20 offer support, although I think it could go further as a move below $57 would break the neckline of the double top, suggesting a technical move back to $52 based on the size of the formation.

The dollar driven decline in commodities is weighing on commodity stocks on Wednesday and therefore acting as a significant drag on equity indices. Major Europe indices are trading more than half a percentage point lower this morning, while US futures are poised to do the same, with futures around two thirds of a percentage point lower.

The latest JOLTS job openings data will be released early in the day and may attract some attention, especially with the labour market performing so well at the moment. We’ll also hear from Bank of England Governor Mark Carney who is due to testify in front of the Lord’s Economic Affairs Committee. I don’t expect to hear anything new from Carney, with the message clearly being that deflation is coming but not worrying deflation, good deflation that will pass and prove to be a benefit to the economy. What we will be looking for is any insight into what was discussed at last week’s meeting, with the minutes not due to be released until next week.

The S&P is expected to open 14 points lower, the Dow 129 points lower and the Nasdaq 27 points lower.

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