The Mighty U.S. Dollar: Connecting The Financial Market Dots

USD Has Strongest Start in Five Years

The US Dollar is having its fastest start to a new year in half a decade. Here are my Top 5 Reasons why:

  • Safe Haven status as COVID-19 spreads both fear and economic slowdown
  • Stable U.S. economic data in comparison to China, Germany, Rest of World
  • US Bond Yields Remain High relative to rest of world (even as interest rates slid year to date)
  • Forward guidance from both ECB and FED keep rates low and higher-yielding USD bid
  • Euro has fallen as industrial production in Eurozone shrinks and the German economy flatlines

The bad news, higher USD hurts global growth.

WHEN THE FED SHIFTED GEARS TO EASING AND CUTTING RATES, ALL IT REALLY DID WAS OPEN THE DOOR FOR EVERYBODY ELSE TO EITHER CUT RATES OR INCREASE THE SIZE OF BALANCE SHEETS, OR BOTH. SO THE INTEREST-RATE DIFFERENTIAL, MONETARY-POLICY DIFFERENTIAL, BALANCE-SHEET DIFFERENTIAL ARGUMENTS IN FAVOR OF A WEAKER DOLLAR HAVEN’T WORKED EITHER. STRONGEST START IN FIVE YEARS

If this analysis is correct – a stronger dollar causes a bull flattening in the US curve – in which case disinflationary signals will pick up.

Growth Projections and Inflation

Growth projections are being revised downward, for the most part, as a result of ‘pricing in’ the economic contraction from COVID-19 which should support disinflation.

  • Goldman: the fallout from the epidemic is set to approximate “the entire US workforce taking an unplanned break for two months”.
  • JPM: “we have slashed our global GDP growth projection for the first quarter of 2020 in half. In China, to a 1% annualized rate this quarter from 6.3% pre-outbreak”
  • UBS: China’s 1Q GDP growth to fall by 1/100ths of a percentage point…. Full-year down to 5.6% from 6.1%

THE INTERACTION BETWEEN THE DOLLAR AND THE CURVE SLOPE IS NOW “A RESULT OF PERSISTENT DOLLAR STRENGTH AND ITS DAMPENING EFFECT ON INFLATION EXPECTATIONS”. HEISENBERG

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Note that this article was sent to clients of LaDucTrading on February 16th, an update on a long Dollar recommendation from January ...

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