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The USD juggernaut - a one-way march to wreak havoc in economies
The wrecking ball that is the USD is on war path, talk of the USD strength will be deafening in US Q2 earnings and some are even making contrasts with the moves seen in the USD in 1980-1985 where it rallied 60% on a trade-weighted basis before we see massive intervention and the USD went on a multi-year decline.
(Source: TradingView - Past performance is not indicative of future performance.)
A stronger USD is typically deflationary, but we can see the cost of USD priced goods going higher and higher and any country with elevated USD-denominated debt is feeling it right now.
This time around the USD is a big momentum trade – the USD holds some true qualities right now. Emerging Markets (EM) FX is trending weaker, especially with EM bond returns some of the worst on record in 2022 – I guess we see capital returning back to the ‘safety’ of the US – its is the least shabby house on the block. Watch USDCNH as it heads into range highs.
- It is once again the default portfolio hedge against equity drawdown – above the JPY, gold and Treasuries
- Trend-following funds (CTAs) are long USDs as price trends, as are real money accounts – that position is building but not quite at extremes, especially from leveraged accounts
- Under the USD ‘smile’ theory, a global growth slowdown and liquidity withdrawal favours USDs
- The cost-of-living crisis and impact on households seems far more pronounced in Europe and the UK
- A flatter US yield curve favours long USD positions
- China’s Covid zero policy sees capital out of China proxies and copper is in a bear market – the USD works well here
- Relative nominal and real rate differentials are now working in favour of long USD positions – where do you go for returns in the bond market. The attractiveness of one’s capital markets moves the currency
- The US have a CPI print tomorrow – the street is betting it will be above the consensus of 8.8% - above 9% would be a surprise but the USD would fly
- Emerging Markets (EM) FX is trending weaker, especially with EM bond returns some of the worst on record in 2022 – I guess we see capital returning back to the ‘safety’ of the US – its the least shabby house on the block. Watch USDCNH as it heads into range highs.
(Source: TradingView - Past performance is not indicative of future performance.)
We can go on, but the flow of capital doesn’t lie and price is always the final arbiter of truth.
The USD has to be on everyone’s radar – we know client flow is certainly looking for a turn lower, but whether that comes anytime soon may require a far weaker CPI print tomorrow. However, while global growth is still a major factor and the Fed keep myopically focused on hiking the USD, in my view looks destined for higher levels. The August Jackson Hole Symposium could be very interesting indeed.
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