Major central banks around the world are indicating an increasing need to ease policy as trade tensions accelerate a global growth slowdown, adding upward pressure to the U.S. dollar and another headwind to corporate earnings in the coming quarters.
Bank of Japan Governor Haruhiko Kuroda told lawmakers in Tokyo Tuesday that it was "crucial" to monitor the impact of currency moves on the broader economy, adding that the bank will "consider easing policy" if it sees it price stability ambitions at risk.
His comments followed a hint from from European Central executive board member Benoit Coeure last week in New York that there "might be scope" for another targeted lending program for the region's banks amid a broader economic slowdown that looks deeper and more pronounced than the central bank had forecast back in December.
The World Trade Organization said Tuesday that its quarterly trade outlook indicator slipped to the lowest reading since March 2010 over the three months ending in December, while Germany's ZEW Institute said that while investor sentiment in Europe's biggest economy had improved, "we do not expect a rapid recovery of the slowing German economy", adding that the economic situation "has been weak, especially in the manufacturing sector."
Global fund managers are piling into cash, taking allocations to the highest levels in a decade, the February Bank of America Merrill Lynch survey of 218 investors controlling around $625 billion in assets revealed, as a net 46% expect global GDP to weaken over the next twelve months and 55% see secular stagnation as the consensus forecast.
The change in tack for both the ECB and the Bank of Japan follows not only persistent weakness in the global economy, but also an acknowledgement from the U.S. Federal Reserve in early January that it needed to be more "patient" with its plans to lift domestic interest rates.
However, while the Fed's policy U-turn has clearly supported American equity markets -- the SP 500 is up more than 9% so far this year -- it hasn't taken any steam out of the U.S. dollar, which has extended gains against a basket of its six global peers to gain just under 2% fro the year to date.
The U.S. dollar index also rose 1.1% over the three months ending in December, but ended the year 3.8% higher than the fourth quarter of 2017.
That move has had a big impact on U.S. corporate earnings, which are expected to shrink by around 0.3% from last year over the three months ending in March, as companies find it increasing expensive to repatriate overseas profits.
Coca-Cola Co. (KO) - Get Report shares, for example, fell nearly 9% over a single session last week after it posted fourth-quarter profits that were largely in-line with analysts' forecast, but noted that 2019 organic revenue growth would slow and comparable earnings would likely remain flat thanks in part to a stronger dollar.
Looking ahead, the strong dollar headwind might be further fueled by increasing global oil prices, which are hovering around the highest levels in three months after having gained more than 25% since their Christmas Eve trough as the impact of OPEC+ led production cuts offsets record U.S. output and slowing global demand growth.
"While it is tempting to look for a risk on, dollar off scenario (as investors put money to work outside of the US), it's worth keeping an eye on crude prices, where Brent is now approaching $67/bl," said ING's global head of strategy Chris Turner. "Last year, US rates followed crude prices with a short lag and thus it would not be a surprise to start seeing US rates (e.g. two-year swap rates now 2.65%) pushing a little higher over coming weeks."
"There's also a case to be made that higher crude prices are also a relative Terms of Trade positive for the dollar as well," Turner added.