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13 Jul 2023

13 Jul 2023

Dollar bulls are an endangered species.

US economic surprise indices are sitting at the highest levels since 2020 as incoming data keeps topping forecasts, defying expectations for a policy-induced slowdown. Upheaval in the US banking sector seems to have ended without inflicting lasting damage on lending conditions. Consumer demand remains remarkably robust. Core inflation is still high. Labour markets are hot. Financial conditions are accommodative, and asset prices are melting up.Yet after a record-breaking 11-year bull run, the greenback remains well below its September peak, and selling pressure has accelerated since mid-July’s softer-than-anticipated inflation print led markets to assume an imminent end to the Federal Reserve’s...

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13 Jul 2023

Pound hawkishness looks overdone.

The British pound is performing remarkably well, with a substantial shift up in interest rate expectations following a string of better-than-predicted data prints, re-accelerating core inflation, and aggressive Bank of England policy tightening underpinning its move upward. It is holding near ten-month highs against the euro and fourteen-month highs against the dollar, and is the strongest in eight years relative to the yen. But – in contrast to our thoughts around some other currencies such as the Japanese yen and Chinese yuan – we believe there is now a lot of good news factored into the exchange rate. Incoming events...

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13 Jul 2023

Expectations are low.

The renminbi has remained in a downtrend for much of the year, falling to its lowest levels against the dollar since November 2022. The upward adjustment in US interest rate assumptions has coincided with a faltering post-Covid economic rebound to weaken rate differentials and limit the appeal of Chinese assets. With domestic demand remaining stubbornly anemic, markets are convinced policymakers are preparing to roll out a range of measures – including more rate cuts – to support growth in coming months. Much like our thoughts regarding the Japanese yen, we believe a lot of negativity may now be built into...

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13 Jul 2023

Volatility is picking up.

Australian dollar turbulence is increasing, with the currency trading in a widening 450-pip band centered around the 0.67-cent mark in recent weeks. The exchange rate has been swung around by shifts in expectations around tightening cycles at the Federal Reserve and Reserve Bank of Australia, China’s faltering post-COVID lockdown recovery, and subsequent stimulus expectations, the downshift in global growth, Australia’s domestic economic resilience in the face of rising interest rates, and evolving risk sentiment. We think these gyrations could be taste of things to come in the third quarter. The Australian and global economies have entered a more challenging phase,...

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13 Jul 2023

A relative economic slowdown could see losses deepen.

According to the precepts of Stephen Jen’s “dollar smile” theory, the greenback tends to rise in value during periods of extreme economic performance – on both ends of the spectrum – and fall in value during periods when the US is growing more slowly than its global counterparts. It seems that just such a “muddle through” scenario is set to unfold, with all of the major components of domestic demand showing signs of exhaustion after an outsized post-pandemic recovery. Fiscal policy at the state and local levels is still providing unexpected stability, and aggregate incomes are rising more quickly than...

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