If there’s a bull case, this is it
The US dollar held a steady bid from Wed-Fri after the Democrats won the Senate and it was the top performing currency after the result became clear.
Could that mark the bottom for the nine-month bear market in the dollar? Or at least a sustained bounce?
The best trade in FX is to always follow the trend, but there is a decent case for dollar strength that hasn’t been told. Here it is.
1) Higher US stimulus will boost growth
Why wouldn’t you want to invest in a country growing that fast?
2) The US will be among the first countries to vaccinate
The countries with the ability to manufacture vaccines are at the front of the line for doses and the US will be one of the first to vaccinate the bulk of its population and achieve herd immunity. That’s built into GDP forecasts but it underscores that most other countries will lag, including emerging markets which will be a year behind. That relative difference is compelling.
3) Higher Treasury yields
This week’s US dollar move coincided with a 20 basis point move in 10-year yields higher to 1.115%. That boosts yield differentials in the US dollar’s favor on many fronts. I think some of the move this week was on bond hedges and I’m curious to see how the dollar performs when yields stabilize, but the rates market is a spot to watch very closely.
4) Fed expectations are too dovish
They’ve been strident in forecasting no rate rate hikes into 2024 but that always comes with a caveat about inflation. They have been talking tough about allowing inflation to run hot and looking through temporary climbs but when they’re seeing 3% year-over-year inflation, will they hit the panic button? Their track record for consistency isn’t inspiring.
I prefer the Bloomberg Dollar Index to the DXY because it’s trade-weighted. As you can see here, it’s challenging the 2018 low after a one-way 14% move since the March high.
That’s a big move.
I don’t think this is a base to build a multi-year dollar bull market but at the very least there’s a case for a bounce. If the DXY is your bag, the chart isn’t significantly different, with the latest bounce coming from within 1% of the 2018 low.
Another spot to watch is USD/JPY. There’s a downtrend from the March highs that’s being challenged. If it breaks, it would be a stronger indication of a retracement phase.
6) Dollar positioning
was the second most-crowded trade. The CFTC FX data also shows a US$30-billion bet in the futures market against the dollar with euro and yen longs particularly crowded.
Convinced yet? What do you think?
I’m giving it a lot of thought this weekend.