Currencies rallying against the dollar
Australian dollar up to a 3-week high against the U.S. dollar. British pound hit a 3-week high against the buck and the Mexican peso, which had been getting drubbing recently is having its best rally in a while, up to a one month high against the greenback.
It would be easy to ascribe this to today’s announcement of a much weaker than expected report on inflation. The Consumer Price Index fell by 0.1% in August while the core CPI (ex-food and energy) rose by 0.1%, which was in line with forecasts.l
The problem with this explanation is that the dollar has been falling against these currencies for the better part of a month. In some cases we even see that the dollar peaked out all the way back in March.
U.S. growth is slowing
A better explanation is that U.S. economic growth may be slowing. There are signs, especially emanating from the fiscal situation, that Federal government spending has lost some of its momentum. You can actually trace this back to the late-February through early May period.
The slowdown in spending seems to be taking some of the wind out of the economy. Let me point out, however, that year-over-year spending is still strong and likely to finish the Fiscal Year (September 30) at around $4.3 trillion. That would be more than a $100 billion increase over FY 2014 and the largest uptick in spending since 2009.
Gov't spending and growth
There is a correlation between the rate of government spending, economic performance and the relative strength (or weakness) of a currency. I have done a lot of research in this area and it is one of the most prescient indicators of exchange rates that I have seen. The good news is that very few people are aware of this and even fewer know how to trade off of this information.
Gov't spending and forecasting exchange rates
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