Will "Inevitable USD Strength" Lead To Another Market Selloff
By Tyler Durden
With stocks the biggest beneficiary of the late January “Shanghai Accord” (that shall not be named), it stands to reason that the US Dollar was the biggest loser. Sure enough, overnight the WSJ writes that the “powerful rallies that have lifted stocks, crude oil and emerging markets for the past three months have one important thing in common – the falling dollar – and investors are growing anxious that it could prove to be the weak link.”
But is a strong dollar about to make another appearance and unleash the next leg lower in risk assets?
While the dollar is down 4.5% this year and near a one-year low against a basket of currencies, other investments have surged. U.S. crude prices are up 69% from their February lows. Gold was up 16.5% in the first quarter, its best in three decades. And emerging-market stocks, bonds and currencies have enjoyed double-digit gains in 2016.
Morgan Stanley analysts quantified the relationship, and found that the correlation between a weak dollar and their own index of investor appetite for riskier assets is near its highest level in 20 years. As the WSJ writes, “the concern is that it is a relationship that could easily go in the opposite direction.”
The dollar is heavily dependent on perceptions of what the Federal Reserve will do with interest rates, and those perceptions could change quickly. Meanwhile, analysts warn that the fundamentals for oil, emerging-market assets and even many stocks look too weak to support the recent price gains on their own.
“Currency is the most influential factor for markets this year,” said Graham Secker, head of European equity strategy at Morgan Stanley. “If the dollar starts moving higher, global risk appetite will fall.”
But just when you think the dollar tide is about to turn, you get such ugly US macroeconomic update as Friday’s payrolls report, and suddenly it feels like the USD has much more room to fall (and, in tried and true centrally-planned fashion, the worse the data, the higher stocks could rally).
To be sure, conventional wisdom and positioning agrees with a “lower dollar for longer” thesis: hedge funds and other speculative investors are now more bearish on the dollar than at any other time since February 2013, according to CFTC data.
However, that bearish positioning also means any sign the Fed is turning more hawkish could send investors scampering to buy dollars, pushing the U.S. currency sharply higher.
“The market has become complacent,” said Steven Englander, head of G-10 FX strategy at Citigroup Inc. “There’s the risk…the Fed gives a sudden indication that really surprises the market.”
The biggest risk, of course, is that Goldman will remain bullish on the USD as it has for the past 5 months, leading to thousands of pips in P&L pain for Goldman FX clients.
But maybe not even Goldman flip-flopping will be necessary for the USD to make a U-turn.
Here is another report, courtesy of Morgan Stanley’s Hans Redeker, head of global FX, who …read more
Source: Will "Inevitable USD Strength" Lead To Another Market Selloff
