Is the dollar rally for real? Bloomberg’s Mark Cudmore says probably not. Or if it is for real, it probably won’t prove to be sustainable over the long run.
Remember, September was the first “green” month for the greenback since February and the bulls are pointing to tax cuts and a hawkish Fed to support their contention that this has legs.
But as BofAML wrote on Monday, “the tax plan is not even close to meeting the Byrd test, [and] has little chance of becoming a reality.”
Meanwhile, although Treasurys have sold off and 10Y yields are well above that fateful Friday in early September when they fell below 2.02 ahead of a weekend that was widely expected to see Hurricane Irma wipe out Miami and North Korea launch an ICBM to celebrate the country’s founding day, some folks have noted that the curve still suggests markets are nervous about the extent to which i) this Congress and this administration has any credibility when it comes to the longer term fiscal outlook, ii) this Fed has any credibility beyond this year and next, and/or iii) both.
So that’s the setup for Cudmore’s piece which you can find below…
Via Bloomberg
There are many flaws in the bullish argument for the greenback.
- The Bloomberg Dollar Spot Index is testing the nine-month downtrend from January’s multi-year high. Based on momentum and market sentiment, a break seems inevitable
- Fundamentals aren’t supportive though, and suggest that even technicians may want to wait for the end of the week before getting excited about this being a sustained rally
- A lot of the latest dollar euphoria is based on Donald Trump’s proposed tax reform. We can have little confidence in when it might come into law, even if passed, or what the final bill will look like. The health-care experience doesn’t inspire confidence
- Even if such a bill passes soon and largely in accordance with current proposals, there’s no reason for it to be dollar positive beyond a short-term sentiment bump. Almost all analysis agrees that it will widen the budget deficit significantly. That’s normally negative for the currency
- This seems particularly worrying for the U.S. given that it’s one of the few highly indebted countries that seems to be making no progress on reducing its debt-to-GDP ratio
- And the latest U.S. quarterly current-account deficit was the largest in nominal terms since 2008
- It’s hard to dispute that the dollar is gaining support from the Fed’s hawkishness. But even here the dynamics must be worrying for bulls. The long end hasn’t been overly impressed, which suggests a lack of confidence in the Fed’s approach
- The dollar has weakened a lot in 2017, but that needs to be analyzed in the context of the massive 2014-15 rally: The Bloomberg Dollar Spot Index remains above any level seen in at least a decade prior to 2015. It’s still an expensive currency globally based on IMF purchasing-power-parity metrics
- Sometimes technicals can dominate fundamentals for a period of time, but fundamentals suggest eager dollar bulls may want to to see a weekly close above the trendline before getting too excited
