Fundamental Forecast for Dollar:Bearish
- Dollar strength is notably concentrated on pairs like EURUSD, GBPUSD and USDJPY which have active counterparts
- A more robust fundamental platform is desperately needed, but the docket is light for support on rates and risk
- Find out what live events – such as the UofM sentiment survey – are scheduled this week on the DailyFX Calendar
The Dollar’s performance lately is impressive no matter how we cut it. The Dow Jones FXCM Dollar Index (ticker = USDollar) climbed an eighth straight week through Friday – that matches the longest run in data going back 15 years. Over that time, it has climbed 3.1 percent. Furthermore, the 0.8 percent swell just this past week was the strongest since January and it pushed the index to 12-month highs. However, behind this rally we find a fragmented and indirect fundamental motivation…a drive that can easily fall apart.
Given the scope of the dollar’s move over the few months, there is certainly an innate quality to its strength. Though not universal, we have seen FX-based volatility readings rise markedly from record lows set through July and August. That in turn bolsters the dollar’s liquidity appeal. Through the ‘return’ element of the currency’s ‘risk-reward’ bearing, Treasury yields and swaps have climbed as the Fed’s return to rate hikes draws nearer. Despite these general developments, there is a material discrepancy between the progress made on the fundamental outlook and the dollar’s performance.
The disparity in market ‘value’ and ‘performance’ starts to show through when we look at the dollar’s performance against its major individual counterparts. This past week would see the single currency leverage a 1.6 percent rally against the Pound, 1.4 percent versus the Euro and 1.0 percent versus the Japanese Yen. These were currencies that were universally pummeled by heavy and active fundamentals winds. Meanwhile, the dollar gained little ground compared to the Kiwi (0.4 percent), was unmoved measured up to the Canadian currency and actually lost ground to the Australian dollar.
If indeed, the dollar is riding high on the difficulties of its most liquid counterparts; then its trend is fragile and at significant risk of stalling. For indirect strength, the Euro is a key patron as the ECB has further turned from the slow tightening path the Fed is on with another round of rate cuts and the announcement of asset purchases. This is certainly not fully priced in, but the recent collapse has drained a lot of short-term excess premium from EURUSD’s position. In comparison, the Bank of England is still on pace to hike rates before its US counterpart; and the market’s overshoot on pricing in an earlier return to the tightening cycle has already proven substantial. As for USDJPY, a sustained rally in risk trends and renewed appetite for expensive carry is very unlikely.
A performance that relies on the synchronized struggle of its major counterparts means that dollar traders will have to be just as vigilant over the global economic calendar as the United States’ own docket. Euro zone inflation figures, Bank of England testimony on the August Quarterly Report and Japan’s 3Q business sentiment survey are just a few scheduled events that pose a dollar risk.
Though, as dependent as the dollar has been on its counterparts for momentum to this point, it wrest back control should its own fundamental themes kick in. Interest rate speculation is the accessible theme. With the FOMC rate decision on September 17 (with updated forecasts and press conference) though, it will be difficult to raise the tide. Virtually no Fed speakers and data more distanced from monetary policy (retail sales and consumer sentiment) will make it even more difficult. The more dramatic but far less probable spark would be through a shift in investor sentiment that sends capital rushing back to the depths of the US financial system – and its currency. Though complacency is far overwrought, it is incredibly stubborn. In other words, it shouldn’t be depended on.