It’s a bit ironic that the dollar looks poised to snap its best streak since 2016 on a day when lawmakers struck a tentative bipartisan agreement to end the impasse which threatened to shutter the government just weeks after it reopened following the longest shutdown in modern history.
The greenback was riding an eight-session win streak headed into Tuesday and at various intervals over the past two years, DC gridlock has been placed in the “negatives” column. But depending on the circumstances (i.e., if partisan bickering inside the Beltway is playing out against a confluence of other foreboding circumstances that together represent a formidable headwind to broader risk sentiment) the dollar can actually benefit from safe haven flows. On Tuesday morning, US equity futures pointed to a sharply higher open and the greenback was little changed, trading mixed versus G10 peers.
What’s especially notable about the dollar’s recent run is that it’s gained in every session since the Fed’s overtly dovish pivot. In other words, the dollar has gained despite the Fed clearly tipping that the next move for rates could be a cut (although the bar for that is probably still very high), depending on the circumstances.
Recent dollar strength is down to a couple of things, not the least of which is the global central bank pivot set off by the Fed and necessitated by ongoing signs of economic deceleration. As BofAML put it last week, “when the most important central bank in the world changes tack, others must follow or risk unwanted currency appreciation”.
Additionally, it’s not clear that shrinking rate diffs are going to be enough to support the bear case for the greenback. This is something we covered in detail late Friday. Long story short, as long as the US economy continues to hold up ok while the rest of the world “blows up around us” (to quote a certain “very stable genius”), the dollar can remain buoyant. “The broad cyclical trajectory of an economy relative to its peers matters most for G10 exchange rate performance, and rate differentials can sometimes fail to exactly mirror broad cyclical trends”, Goldman said Thursday.
There’s a raft of data on deck this week in the US that will put the economic pillar (i.e., relative economic strength in the US) to the test and it’s possible that any broad risk rally catalyzed by a deal to keep the government funded through the fall and/or progress on trade could see the dollar come off a bit, especially if folks take profits.
Still, it’s a matter of finding something else, and if you can’t locate that “something”, the dollar wins by default.
“I don’t think the dollar will do well in 2019 but being bearish has to mean being bullish of something and there’s not much to like”, SocGen’s Kit Juckes wrote on Tuesday, adding that “while EUR/USD ought to hold its current rage for now, and move higher in H2, that’s only because the dollar will weaken as the economic cycle turns lower.”
As for the yen, Juckes notes that it’s “too cheap not to be [the] preferred currency in times of trouble, but bulls requite masses of patience.”
Meanwhile, don’t forget that “soggy dollar” was the consensus on Wall Street headed into 2019 – so if you think consensus is a contrarian indicator, well then…