By Michael Stanes, Investment Director at Heartwood Investment Management
The US dollar has been under pressure over the last month, falling 6% on a trade weighted basis. We should not forget that the US dollar has been on a considerable run since July 2014 and a pause in that rally was to be expected. We do not, however, believe that it marks a significant reversal of the strong US dollar trend and that over time the interest rate differential and relative economic fundamentals will come to the fore once more in support of the US currency.
Recent data disappointments are nonetheless challenging this view. Most forecasters are expecting a revision lower in first quarter US growth into negative territory, while second quarter growth is likely to be curbed by the redress of high inventory levels. Tellingly, eurozone first quarter growth surpassed the US, which, according to some economists, will be ‘the story of the year’.
On balance, though, we continue to believe that the first quarter weakness is to some extent a replay of this time last year due to seasonal weather effects, which have been compounded by port strikes as well as by capital expenditure reductions in the energy sector. Energy companies have reacted quickly to oil price movements, but we expect the drag of capital expenditure cuts to fade as the oil price has stabilised.
More difficult to explain is ongoing consumer data disappointments, highlighted by the latest retail sales report in April. The warmer weather has not enticed consumers back to the mall – department store sales fell 5.1% year-on-year in April. But rather than depicting a picture of consumer retrenchment, we consider the underlying details are more nuanced, and potentially reflect a shift in US consumer spending habits.