Authored by Bloomberg macro strategist Richard Breslow,
A week ago, much of what you heard about the dollar was that it wasn’t doing anything, and traders would have much better opportunities putting their efforts into other markets. Yet, it feels like no one can stop writing about it. And the overwhelming consensus view is that the U.S. currency is going down. Not necessarily with immediate dramatic effect. But a look at the Bloomberg compilation of bank forecasts shows a steady weakening that, over time, adds up to quite a decent move.
In fact, the biggest source of contention seems to be when, not if, the move will start. Which always makes me wonder just how sure analysts really are about a call they are making with seemingly great certainty.
In any case, while waiting on a market that has been going nowhere fast, strategists and traders have been shifting their attention to other currency pairs to trade which purport to take the dollar out of the equation. But you never really can. Where -- and, perhaps even more importantly, why -- the dollar moves will affect how these other currencies ultimately behave. So it is important to understand the dollar forecast implicitly embedded in those perceived opportunities. Including if they actually require the currency to continue to do nothing. Because it can sit here for a very long time. But not forever.
The market will always look for safe havens in times of trouble. It’s a major characteristic of how certain currencies trade. But a resulting strong Japanese yen or Swiss franc is not a measure of the overall outlook for the dollar. Which, by the way, has some awfully strong attraction in its own right when things get dicey.
A lot of dollar forecasts are based on the notion that the Fed Funds rate will be going lower and, therefore, will be dollar negative.
You don’t have to be a believer in the Efficient Markets Hypothesis to accept that traders are already aware of what futures are pricing in. Unless you think a big chunk of fixed-income pricing is also a safe-haven trade, and doesn’t really reflect a fair representation of policy expectations. Certainly, the latest calls for 50 basis points in July would argue that there is room for a surprise. But that’s market analysis following price action.
And let’s not forget, the Fed isn’t going to do shock and awe in a vacuum. The JGB curve has been bull flattening on growing expectations of further BOJ easing. Notwithstanding today’s weak 30-year auction. And the SNB’s comments after keeping rates steady at negative 75 basis points made it quite clear they will be as dovish on rates as they might need to be. And the currency is a big part of their calculations. In a masterstroke of understatement, SNB President Thomas Jordan said it appears that the time for global rate rises has been pushed back.
Does anyone credibly think the ECB or PBOC is looking to raise anytime soon? A look at the Eurodollar and Euribor strips tell a great story. The U.S. curve has started to price higher rates back in after a period of easing. The Euribor curve, on the other hand, has been flattening all year.
There has been an impressive narrowing of the U.S. to German two-year interest rate spread that has helped to at least buoy the euro. But consider where both tenors started. And, more importantly, that the U.S. technical chart looks far more overdone than its German equivalent.
And it’s dangerous to read too much into any directional signals being given off by the options market. Other than the very encouraging fact that they are starting to move around. On Monday, dollar puts were bid. By Wednesday, risk-reversals were showing “dollar downside bets are waning”. So it goes.
Multiple times this year, DXY has approached its 200-day moving average, got everyone excited, and then bounced.
Yesterday was another one of those episodes. Although the bounce was somewhat subdued. Using this level as a major pivot may be the best indicator of where short-term dollar sentiment lies. It’s close and rising toward spot. What more could you ask for in such otherwise ambiguous times.