USD: There’s something new going on here – Deutsche Bank
|Alan Ruskin, Macro strategist at Deutsche Bank, suggests that there’s a lot of back-fitting going on, as the market speculates about what is behind the strengthening of the USD in recent weeks.
Key Quotes
“The reality is the narrative, whether post hoc rationalized or otherwise, is evolving in the following ways:
USD strength gained some of its initial impetus from higher Treasury yields, led by talk of tapering at the BOJ (essentially confirmed by Kuroda on Friday) and the ECB (largely dismissed by Draghi on Thursday). Oil and its impact on inflation breakevens have also been part of the same Treasury story. More recently, a stronger USD has started to suppress oil prices and breakevens, showing how the causal relationship can go both ways in this relationship.
Conviction on a Fed hike in December has continued to grow, with the market for the first time in this tightening ‘cycle’ displaying confidence well before the key FOMC date that the Fed will hike. Even very gradual tightening by the Fed in 2017 will be favorable for the USD, in the context of how little is priced in. If the Fed hikes 25bp in December, the late 2017 fed fund futures contracts (reds) will surely sell off since they have less than 50% of a second hike priced in.
The DXY has tended to go up with Hillary Clinton’s standing in the polls, something that was not the case earlier in the campaign. Regardless of the election out-turn, a 2017/8 fiscal stimulus is widely seen in the offing - a policy initiative unlikely to be matched by any of the other largest economies.
In the G10 world, there are few alternatives to the USD with any real staying power. CAD now has to deal with a dovish leaning BOC; AUD and Kiwi have valuation concerns; GBP some obvious ‘hard Brexit’ worries; the JPY is path dependent and USD/JPY needs a break below Y100 to get hedging going again; while long Scandis and CHF are much better played versus the EUR than the USD.
The cumulative nature of the above factors works with EUR/USD challenging the year lows at 1.0711 soon, and plays to our 1.05 EUR/USD year-end forecast. It also works with the closing gap between EUR/USD and USD/JPY vol. However, a break of the bigger cycle DXY highs and EUR/USD lows likely needs a new catalyst. Politics is one possibility, but political events are often more negative before the event, unless like Brexit, their widespread ramifications generate lasting uncertainty and an ongoing policy dilemma, that includes tolerating and/or encouraging currency weakness.”
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