USD: Strong US equities, but no surge in foreign inflows - Nomura

In view of Bilal Hafeez, Research Analyst at Nomura, one factor that has been attributed to dollar strength this year has been superior US growth and equity outperformance.

Key Quotes

“This was likely a factor that weighed on many EM markets, especially in the context of trade wars, which would hamper the growth of such markets.”

“But in terms of equity performance, the dollar (vs euro) has shown a greater correlation with the relative performance of the financial sectors. This would have captured the concerns of the new Italian government and would reflect ongoing risks around the euro-area financial system.”

“Furthermore, there appears to be no evidence of foreigners jumping into US equities over the past year. Admittedly, President Trump’s tax cuts did see very large repatriation of foreign earnings and an associated pick-up in share buybacks, which likely helped the dollar. But this is a temporary factor, much like the one in 2005.”

“So a positive flow picture for the dollar is less obvious for the balance of the year. If anything, the equity flows to watch are the ones to the euro area which have exhibited larger swings over the past year. Needless to say that until there is more evidence of an equity flow story into the US, our medium-term bearish dollar view would remain intact.”