Four Reasons The USD Is Slipping
Ashraf Laidi | Sep 21, 2018 08:55AM ET
The US dollar has suddenly turned in a move that's left some market watchers scratching their heads, while others vindicated. Earlier this week, Ashraf' issued a special video for Premium subscribers titled "Invalid Thesis" related to the US dollar. The Dow and DAX trades were stopped out while the EUR/USD and USD/CAD were closed at a profit. Canadian CPI and retail sales are due next. Meanwhile, the pound is falling across the board on a BBC announcement that PM May will make a statement at 15:45 London time indicating she will not be changing her position on Brexit (TRNSLTN: sticking with her Checkers Speech and augmenting odds of a no-deal Brexit).
The US dollar has quickly fallen to multi-month lows on a variety of fronts even as Treasury yields rise to multi-month highs and economic optimism rises. It's a change in correlation that's caught many off guard. Here are some of the reasons for the shift:
1) Global growth Trade wars are a looming risk but so far the hype hasn't matched the reality. Companies may be able to better-withstand the pain than believed
2) Midterms Pollsters are saying there is a 75% likelihood Democrats will take the House. That will cripple any chance of further US tax cuts but, more importantly, it will curb Trump's ambitions on trade and leave the US deadlocked once again.
3) Positioning This has been a looming risk on almost every front. CFTC positioning shows the market unequivocally long US dollars and better economic data in the UK and elsewhere has inspired short covering.
4) Twin deficits Rising yields are at least partly due to US trade and current account deficits expanding and the potential costs of financing external debts at a time when opportunities are beginning to present themselves elsewhere.
What's next? Stephen Jen pioneered the idea of the 'dollar smile'. It's a chart illustration of how the US dollar strengthens as growth is either 1.5% stronger or 1.5% weaker than G7 peers. The latest signal from the market may be that growth elsewhere will catch up to the US in the year ahead as the effects of the tax cut fade and other economies pick up. It's early days still, but this is a long-term trend to watch.
Get The News You Want
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.