Saturday, January 28, 2017

Can USD rally regain strength?

Marc Chandle posted the following Bloomberg chart asking: "Are Interest Rates No Longer Driving the Dollar?". He concludes that the drivers of the dollar did not change.

If we look at the data (illustrated on the following charts) we find that USD relative differentials are decreasing as all the other big economies are catching up. Europe is a good example:
- GDP is converging to US level
- CPI sharply up, thogh US maintains the relative difference
- The real yield are very close to the US.

There is no doubt the that there is a big difference in the central bank rhetoric. The questions are:
- How long can the policy divergence be maintained should the data converge further?
- How Trump economics (and the world's response to it) would alter the relative differences.

It is also worth to take a look at the 10y German yield as it is trending up.

The USD Index after the breakout is back to the 2 years long trading range, just bouncing back from the resistance set in early December last year. I'm long the index, but I use very tight money management as the direction is not so clear because of the fundamental.It might turn out (not for the first time) that fundamentals not always good for trading.
Equities still do not seem to bother anything. Buying the pullbacks is the only reasonable approach.

No comments:

Post a Comment