The US dollar is the global reserve currency, and serves as a benchmark for pricing a range of assets such as commodities. Based on a recent survey by the Bank for International Settlements, more than 40% of all currency trading involves the US dollar, thus the performance of the currency is watched closely around the world.
The US dollar is currently trading at three year lows thanks to rising global risk appetite, strong growth outside the United States and a sharp run-up in the Japanese yen. As global equity markets rebound, safe haven flows into the US dollar are reversing. Looking at growth, current and forward-looking indicators suggest that growth in the Eurozone is on track to keep accelerating. While recent Japanese GDP growth was fairly disappointing, the yen strengthened following the announcement due to its safe haven characteristics. As USD/JPY is traded in significant volumes, a strengthening yen tends to weaken the US dollar in relative terms. Turning to US data, the US dollar has been fairly immune to positive economic data and rising US Treasury bond yields. Thanks to solid jobs and inflation figures, US Treasury yields are rising as the market bets on a faster pace of rate hikes. While the buck typically benefits from higher relative interest rates, this isn't the case today as markets expect monetary policy to tighten around the world. Later today, we will downgrade our short-term outlook to bearish, while our medium-term outlook remains bearish.
USD/JPY is down sharply today and currently trading above 105.70. EUR/USD is up and trading above 1.2540. The pound is up, and GBP/USD is currently above 1.4140.
Looking at US economic data this week, markets will be focused on retail sales and consumer price index figures. The monthly budget was worse than expectations. The YoY Consumer Price Index beat estimates (2.1% vs. 1.9% expected). MoM retail sales (ex-autos) were lower than estimates (0% vs. 0.4% expected). Initial jobless claims (230k) and the NAHB housing market index (72) met expectations. The Philly Fed manufacturing survey (25.8 vs. 21.1 expected) was ahead of expectations. MoM industrial production (-0.1% vs. 0.2% expected) and capacity utilization (77.5% vs. 78% expected) were slightly below consensus estimates. Later today, we’ll get housing starts and building permits. Last week, strong PMI numbers suggested a positive outlook for US growth.
As the dollar weakens, we are downgrading the dollar to bearish in the short-term. Note that the currency is now trading within normal conditions in the short-term time frame. Our analysis is based on various technical indicators when looking at a daily chart of the US dollar index.
Thanks to recent dollar weakness, we are downgrading the US dollar to bearish. Note that the currency is trading within normal conditions. This is based on technical indicators when looking at a weekly chart.
Policy: While the US Federal Reserve remains on a hiking path and recently passed tax cuts should improve inflation expectations, the US dollar remains weak. While most currencies are highly sensitive to changes in domestic policy, the US dollar is unique as it is a global reserve currency. By definition, a global reserve currency is a liability currency, meaning that is borrowed heavily in international lending markets. As most cross-border lending is conducted in USD, strong global growth leads to an acceleration of US dollar loans chasing international investment opportunities. This phenomenon has weakened the currency in recent history. The dollar is thus countercyclical by nature, as it weakens when ex-US growth is strong, and strengthens during global downturns.
Sentiment: Looking at recent Commitments of Traders reports and technical indicators, speculator sentiment towards the US dollar remains firmly bearish. When positioning becomes too extreme, the dollar is more likely to experience relief rallies. As global economic conditions remain benign, as we have described above, it is still too early to suggest that we are on the cusp of a longer term US dollar bull market. While the dollar will continue to enjoy small rebounds when bearish sentiment becomes too extreme, the dollar's longer term trajectory remains bearish.
Economic data: The US economy turned a corner in late 2016, and has since delivered accelerating rates of annual growth. From its lows in Q3 2016, year-on-year economic growth has accelerated in rate of change of terms. Looking at forward-looking indicators such as survey data, sentiment and industrial production all suggest a continuation of the current expansion. Despite rising crude oil prices, inflation and inflation expectations remain fairly subdued. Unless crude oil prices rise sharply in 2018, we expect inflation to resume weakening later this year.
The US dollar currency index, a measure of USD against six major peers, declined by 9.9% in 2017. Last month, the currency index continued declining and fell by another 3.3%. Given the speed of the recent decline, the US dollar started looking oversold according to technical indicators around mid-January. While we warned that the currency was looking oversold in several recent editions of our US …
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