The USD has strengthened since September after trending down for the first eight months of the year, but its gains have stalled in recent weeks, and the jury is out as to whether it will revert to its weaker trend earlier in the year or push on, according to Greg Gibbs, Analyst at Amplifying Global FX Capital.
Key Quotes
“The rebound in the USD since September has some sound fundamentals; strengthening US economic reports, Fed sticking to its guns, and tax policy reform progress. However, the market is not convinced; US bond yields tried to go up, then slipped back. Equity investors have not yet been overly perturbed by the USD rebound, continuing to drive up global equities.”
“Emerging market currencies have been caught somewhere between following stronger EM equities higher, or falling back against a firmer USD. In the first eight months of the year, the dollar smile theory was playing out with moderate US economic growth and weaker inflation trends sending capital towards EM and other developed market equities where growth was stronger and synchronized. This helped reinforce the USD down-trend and see the market tend to ignore a firming US rates advantage.”
“We are now seeing an unusual divergence in EM bonds and currencies from EM equities. They will probably have to converge at some point either because the USD resumes broader weakness, or EM equities correct lower in a stronger USD environment. Amidst the broader uncertainty, we see downside risk for the AUD as the RBA reinforces a cautious steady monetary policy stance after weaker than expected Q3 CPI inflation, increasing political uncertainty, a slowing housing market, and Chinese commodity demand risks.”
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