Divergence between the U.S. and other Economies Keeps Dollar Bull Case Alive

Our underlying constructive outlook for the US dollar remains intact.  It is broadly based on the divergence between the US and most other major economies.  The US acted early and aggressively to counter the Great Financial Crisis.  Unorthodox policies, such as quantitative easing, were adopted years before the ECB and BOJ.  This has produced different outcomes.  US economic growth may not be impressive by pre-crisis standards, but it does not seem particularly fragile. 

CFTC: From the Long to the Short of It

The combination of a robust US jobs report, speculation of bolder action by Japan, the possibility that the ECB drops the capital key to overcome the ostensible shortage of some core bonds (e.g. German bunds), and the anticipation of easier BOE policy appears to have generated a change in sentiment among speculators in the currency futures market. 

Other Currencies Matter

The US dollar is easily the most traded currency, and despite the plethora of other currencies, it is on one side of nearly 90% of all trades.  Yet the movement in the foreign exchange market presently is not so much driven by the dollar, as it is other currencies. 

Post-Brexit, Emerging Market Equities Bested Their Developed Competition

Since the UK voted to leave the EU, emerging market equities have outperformed equities from the developed markets.  This Great Graphic, composed on Bloomberg, shows the MSCI Emerging Market equities (yellow line) and the MSCI World Index of developed equities (white line). 

Both time series are indexed as to June 15, but they were at nearly identical levels as the UK voted.  The developed market equities fell more than emerging markets.  The UK and Japanese stocks were particularly hit, and the drop in yields saw financial stocks crushed.  

When is a Bottom a Bottom?

With the Bank of England apparently surprising the market more than one might have expected, given the split surveys, many are thinking sterling has bottomed. 

If it has bottomed, where could it go?  A number of technical considerations suggest toward $1.4200. 

Three technical considerations point to that area.  The Great Graphic here created on Bloomberg shows the 61.8% retracement of the Brexit fall is found near $1.4170.  The 100-day moving average is $1.4195. 

CFTC: Currency Speculators still on the Dollar Sidelines

The UK voted to leave the EU. The German and Japanese yield curve is negative out through 15 years.  The entire Swiss curve has negative yields.  There is little doubt that the US economy was recovering from a soft six-month stretch even before the recent string of data.  Even then, speculators in the futures market mostly added to foreign currency exposures.

Is the Yuan Really Weak?

Here are two Great Graphics that portray two time series: the dollar-yuan exchange rate and the yuan against a trade-weighted basket.  The first chart comes from a highly reputable consulting firm. It replicates the trade-weighted basket that Chinese officials unveiled and shows how it would have performed in the past.

Don't Panic! Buy...Maybe

Financial markets around the world are responding to current political uncertainty in both Australia and the UK by sending stocks, bonds and currencies on a rollercoaster ride.  The far-reaching implications of Brexit caused the S&P/ASX 200 volatility index (A-VIX) to spike to the highest level since the start of 2016. Similarly, the A-VIX jumped 5% in the opening minutes of trading on Monday after it became clear the federal election would remain unresolved.

Life in the Slow (Trading) Lane

It sounds like a scene from “Jurassic World”: fast, agile predators pursue their slower, less nimble prey, as the latter flee for safer pastures. Yet this ecology framework turns out to be an apt analogy for today’s financial markets, in which ultra-fast traders vie for profits against less speedy counterparts.