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 slightly lower today against major currencies today. The buck is currently the weakest against the euro and the Australian dollar. Yesterday, the dollar surged alongside rising US Treasury yields. Since mid-April, the dollar has been strengthening as US bond yields rise in anticipation of future rate hikes.
Looking at US Treasuries, 10-year bonds have finally managed to close above 3%. The bonds are currently yielding 3.031%. While the yield curve has been steepening in recent weeks, this is out of sync with the longer term trend. In the short-term, higher crude oil prices are driving inflation expectations. In turn, this is driving bond yields and the US dollar higher. In the longer-term, the yield curve is likely to resume flattening once the crude oil bull market runs out of steam or if US growth decelerates. As both growth and inflation are simultaneously accelerating today, expectations are rising for more rate hikes (helping the dollar). Our short-term outlook on the US dollar is bullish, while our medium-term outlook remains neutral.
USD/JPY is down slightly today and currently trading above 109.30. EUR/USD is up slightly and trading above 1.2170. The pound is up slightly, and GBP/USD is currently above 1.3940.
Looking at economic data and events from the US this week, traders will be paying close attention to upcoming Q1 2018 GDP growth figures. The Chicago Fed national activity index for March (0.1 vs. 0.27 expected) was below expectations. Existing home sales for March (5.6m vs. 5.5m expected), Markit services PMIs (54.4 vs. 54 expected), and manufacturing PMIs (56.5 vs. 55 expected) were ahead of expectations. S&P/Case-Shiller home prices for February (6.8% vs. 6.3% expected) and March MoM new home sales (4% vs 1.9% expected) were both ahead of expectations. Later today, we’ll see weekly initial jobless claims figures as well as durable goods for March. On Friday, the most important day, we’ll see Q1 GDP growth and Q1 personal consumption expenditures. We’ll also see the Michigan consumer sentiment index for April. Last week, the Fed’s Beige Book suggested that growth continues to accelerate at a moderate pace.
As the dollar gains strength, we are now bullish on the dollar 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.
As the dollar trades sideways, we are now neutral on the US dollar. 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.
In our previous take on the US dollar in early February, we wrote that the currency was set to remain weak. At the time, ex-US growth was accelerating, while speculator sentiment was only mildly bearish. While dollar bulls have argued that rate hikes should help the currency, we wrote that expectations for monetary tightening were rising around the world, limiting the impact from the Fed’s action…
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 …
Looking at this week’s Commitments of Traders Report, bullish extremes continue in long crude oil, the euro and the British pound. Net long positions have also grown this week for the two currencies and the commodity. The purpose of this report is to track how the consensus is positioned across various currencies and commodities. When net long positions become crowded in either direction, we fla…