The research team at BBH explains that the idea that the dollar bull move is over in gaining adherents and now seems to be the consensus view which is reflected in bank forecasts, futures positioning and indicative pricing in the options market.
Key Quotes
“We are not convinced. In our view, the key driver of this, the third significant dollar rally since the end of Bretton Woods, is the divergence of monetary policy broadly understood, and that divergence does not appear to have peaked.”
“The Federal Reserve is on track to hike rates in the middle of June. It will be the third hike since the November election. In addition to keeping the door open to another hike this year, the Federal Reserve has signaled its intention to begin, however slowly, the reduction of its balance sheet. In the meantime, regardless of potential changes in its risk assessment, the ECB is unlikely to lift the negative deposit rate or even stop expanding its balance sheet this year. The Bank of Japan is expanding its balance sheet too, though not that the JPY80 trillion a year as had been the case. When stripped of food and energy, Japan is still not experiencing inflation.”
“Although the eurozone has grown faster than the US over the past couple of quarters, the next set of high frequency data is likely to confirm that the US economy is not so fragile. Auto sales are likely to have improved this month, and the May jobs report should be solid even if not spectacular. In the eurozone, the preliminary estimate for May should show softer prices. The UK PMIs (manufacturing and construction) will likely weaken. Japan is likely to report continued weak consumption but higher industrial production. Even if Q1 capital spending hints at and an upward revision to Japanese growth, the BOJ is nowhere near changing policy.”
“The Dollar Index held the 61.8% retracement objective of the rally that began in early May 2016 just below 92.00. It finished the week flirting with 97.50. A convincing move above there helps carve out a trough, and a push above 98.00-98.15 would boost confidence that a low is in place. The MACDs and Slow Stochastics are about to turn higher.”
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