Why the US Dollar Outlook is Frightening

RBA DECISION - There wasn't a whole lot going on in Monday trade and yet it was a good day for the book, with AUDNZD running up and pushing into the money. It seems some China PMI data, solid second tier Aussie readings and positioning ahead of the RBA decision all managed to factor into the recovery rally, though it will be interesting to see where the market is trading now that you're reading this update, almost certainly after the RBA has already come out with its decision. We have a long way to go with this one if it is going to do what I think it can, so whatever happens on Tuesday isn't going to be a game changer. On a short-term basis we need to see the rate get back above 1.0600 to suggest that it could be getting ready to make another big push to the topside. 

DOLLAR BLUES - One thing's for sure right now. There's absolutely nothing going for the US Dollar. If you thought the Fed was going to raise two more times this year, those hopes took a serious blow last Friday in the aftermath of the very unimpressive US employment report which not only was soft but also showed a major disconnect between the impact of artificial Fed support and the impact on the real economy. How so? Well, when you have an unemployment rate at super low levels of 4.3% all while wages have barely pushed up, you probably have a problem on your hands. The fact that wage growth has barely budged should be a major concern for the Fed. The only comforting thing about it is the fact that it will keep the Fed from raising rates some more and really panicking the market. 

NO OFFSET - And if you think the US administration's policies of tax reform and fiscal spending are going to help the Buck, think again as these reforms feel so far off that the only thing the market needs to be taking seriously is the administration's protectionist policies meant to weaken the US Dollar in an attempt to bring it all back home and bolster exports. I had been well aware of this protectionist policy several months back and knew it would be a Dollar negative story, but I also was looking for the Fed to deliver on its guidance this time round, which I believed would offset any US Dollar weakness from protectionist measures. But now with both the Fed and US administration in positions to weaken the Buck, it's really hard to see any redeeming qualities in the US Dollar at the moment.

NOT EVEN RISK OFF - Of course there was one other potentially US Dollar supportive strategy that has fallen by the wayside in 2017. Into 2017 there was an expectation that between uncertainty surrounding the US administration, the start to Fed policy normalization and rising geopolitical risk, there would be a major capitulation in the US and global equity markets that would ultimately fuel a mass rotation to safety currencies, with the US Dollar in a position to benefit the most. But stocks are still racing to record highs and the prospect of US Dollar strength on a flight to safety bid is on hold right now. So all of this says the US Dollar will continue to decline in the days ahead and there isn't much that is going to be able to stop this momentum. 

BIGGEST FEAR - But my biggest worry for the market is that somehow the US Dollar somehow finds a catalyst to get it going again, which would make things really ugly out there. So if we do see something that gets equities rolling over, even in the face of a less hawkish Fed and weak US Dollar policy, the Buck could come roaring back in a furious kind of way. I had always said I hoped the equity market reversal would come from good news over bad. My hope was that US economic data would be strong, wage growth would be on the rise and the Fed would be forced to raise rates. Stocks would all of a sudden be less attractive and the market would rotate knowing that this was more of a necessary move than a panic move. 

DOWN BUT NOT OUT - But if it all comes crashing down on bad news (something that has been supporting stocks for many years on the implication that bad news would keeping rates lower for longer), I fear it will get quite nasty quite fast. Monetary policy is exhausted now so there is no more the Fed can really do to make things more attractive. This leaves the market vulnerable if the economy is cooling down again and if a recent run of softer data in the US is actually not transitory in the way the Fed had hoped. I hope this isn't the case but the more we move along the way we have been, the more I think this is where we could be headed. So while I won't be looking to buy the Buck right now, I still am holding onto that view we could see the Dollar rise again....only not for the best of reasons this time.