Timecheck On the #USD party coming up

With the reinvigorated ‘risk rally’ remaining dependent on the perennially weak dollar and with the ‘virtuous’ circle of Federal Reserve ease keeping the greenback underwater and hence fuelling the risk rally [see what I mean?] teams are being dispatched to quiet corners of big money-making institutions around the world, to work out when the Fed is most likely going to toughen up.

By now, if you’re involved in the money markets, I’m sure you’ve had your fill of comment on the Fed’s latest announcements and Bernanke’s first-ever press conference last night.

That was my excuse to keep the following short.

One major potential source of higher US rates, which would very likely serve to re-rate the dollar in their wake, would be stronger US economic data – of course.

So far, of course, again, such data have not managed to rescue the USD.

Fixed-income strategists at Barclays Capital note an inverse ratio between the USD Index and their proprietary US Data Surprise Index during QE1.

And they say the same thing is once again occurring with QE2.

They put the inverse relationship down to the persistently dovish FOMC leading the market to believe it will not react fast to stronger US economic data when compared to other central banks e.g., ECB, RBA – the latter of which are seen as more likely to raise rates in response to stronger US economic data than the FOMC itself!

Judging by the nuances of the Fed’s statements overnight, what might trigger a tougher stance more than any other factor might be a large decline in the US unemployment rate, given Bernanke’s focus on this statistic.

 US labour market report for April coming right up.

 Friday week, that is. [May 6]

ThSM