E Markets: Bruised

The work of this research matches much of the work of the Fed on yield curves and their role in the economy.  This is the key observation - In other words, forward-looking foreign exchange markets tend to incorporate expectations on inflation, the business cycle and monetary policy as embedded in the entire yield curve. However, it's not obvious which individual yield curve factor is most important for the RTWI in any given period.

What this means for the USD? Markets are going to continue to see the US inflation risks and yield curve as key drivers for value in the USD into 2019. The bearish USD view is back in force for next year – just like it was in 2018 - on grounds that its 1) overvalued by 10-15%; 2) Fed rate hikes slow or stop; 3) US growth slows or goes into recession. The focus is on rates and the US yield curve in predicting such.  

On the face of it – predictions about US rate policy shifts and US curves are difficult given the new FOMC data dependency. This means a higher band of uncertainty for the factors driving the dollar. As for valuation arguments – PPP is a slow moving metric where the USD can remain overvalued for extended periods.  The EUR PPP is the best way to view the dollar story and the USD isn’t the extreme here – better to look at the CHF, NOK and AUD as having room to drop in 2019 with EM recoveries as the most likely. 

What Happened?

View single page >> |

View TrackResearch.com, the global marketplace for stock, commodity and macro ideas here.

How did you like this article? Let us know so we can better customize your reading experience. Users' ratings are only visible to themselves.


Leave a comment to automatically be entered into our contest to win a free Echo Show.