Guest Post: The U.S. Dollar – Return Of The King?
By Tyler Durden
Submitted by $hane Obata
USD: Return Of The King
Falling oil prices, China growth fears, submerging markets, Brexit and Italian banks. All of those risks have one thing in common: They have not derailed the US economy. Despite concerns about a recession, it continues to grow at a steady pace. According to the Atlanta Fed, real GDP is expected to grow by 0.7% in Q1’16. That is not a great number; however, the series is extremely volatile.
sources: Bloomberg, @Not_Jim_Cramer
It would not be surprising to see growth rebound to 2% or more in the coming quarters.
Global investors are counting on the US because of lackluster growth elsewhere. Europe is doing fine; however, deflation remains a concern and bank credit growth is turning down. Japan continues to fall in and out of recession. In the emerging world, the BRICs are crumbling. Brazil & Russia are suffering due to falling commodity prices while China continues to decelerate. Going forward, rate differentials, relative economic strength and divergent monetary policies should provide support for the USD.
Sentiment & Positioning
With all that said, as of Mar29’16, the net speculative long position in the USD was 7% of open interest, the lowest it has been since Q2’14. This indicates that speculators are the least bullish they have been in nearly two years.
The US Dollar Index is sitting at 94.62, just above a critical support zone at 93-94. Meanwhile, the Trade-Weighted Dollar Index has pulled back ~3.4% from its high on Jan20’16. It is hard to tell that long USD is a consensus trade because investors have lost their conviction.
FX, Rates & Monetary Policy
USDCAD: Has fallen to 1.3011 from a high of 1.4692 on Jan20’16. This is a direct result of the relief rally in oil, which has risen to $36.79 from a low of $26.05 on Feb11’16. These moves have not been driven by improving fundamentals. Rather, they are mostly attributable to short covering.
via @Ole_S_Hansen
Rate differentials (see the following chart), relative economic strength and divergent monetary policies should support USDCAD in the near term. Also, it is unlikely that the bear market in commodities is over.
sources: Bloomberg, @sobata416
EURUSD & USDJPY: In Europe and Japan, easy monetary policy will be present for an extended period of time. The ECB and BOJ have made it clear that they will do “whatever it takes” to protect their countries from deflation. The ECB recently announced a set of new measures intended to support the Euro Zone. Equities have responded positively but the Euro has not. EURUSD is trading at 1.1389, up from a low of 1.0538 on Dec3’15. Japan is facing the same issue. Even though Japanese equities …read more
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