Generally, Wall Street earnings have no direct impact on how we view the dollar outlook. Yet, there are exceptions and this week is one such notable example. What types of earnings are significant enough to shed light on the dollar’s future; you might wonder. The simple answer is this: Bank earnings, which are abundant this week.
Why do Bank Earnings Matter?
As we all know, the Federal Reserve has the greatest impact on the dollar. Outside of the Fed, bank earnings impact the dollar’s outlook because they reveal the credit supply. Of course, the supply of credit in the US economy affects the American consumer. In turn, the American consumer impacts inflation. And that brings us full circle since the inflation outlook typically helps shape Fed policy.
Which Earnings to Watch?
Now, before we delve into the details it’s important to realize that we are watching growth in loans, not profits. While profit growth is important, loan growth is more relevant to stock investors than to FX investors.
The banks due to report are among some of the largest in the United States. The list includes Wells Fargo, JPMorgan Chase, Bank of America, U.S. Bancorp, Citibank, SunTrust and Northwest Bank. Each will report the value of all of the loans approved over the period. Collectively, their report on the US credit market provides a good indication of the supply of credit to the economy.
Banks Loans and the Dollar
When we compile the data from the banks’ balance sheets, we can see a rather encouraging trend. Loans in the past quarter have grown and it looks like there is a positive trend for credit growth.
More growth in Q3 would suggest that the credit supply is likely to continue to expand. Of course, then, it’s likely that inflationary pressures might accelerate. Then, other indicators, e.g. core inflation, consumer spending and even housing prices, could surprise for the upside. All of which would be positive, suggesting that the US economy is resilient and growing.
Naturally, that would suggest that inflation might be heating up, too. Once again, we come full circle. Higher inflation could mean a Fed rate hike this year and thus provide support for the dollar.
Negative or flat loan growth could indicate that the US economy is softer than previously believed. And while it wouldn’t necessarily eliminate the dollar’s bullish bias it could certainly suggest that momentum might slow. How will bank earnings end up? Watch for my dollar recap, this Friday.
Look for my post next week.
INO.com Contributor - Forex
Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.