As noted on Wednesday afternoon, the dollar managed its first monthly gain in four in February, leading some to wonder if we’ve seen a turning point for a greenback that’s been more “beleaguered” than Jeff Sessions after a Trump Twitter tirade.
Of course the dollar story is complicated these days. On one hand, you’ve got a ballooning deficit in the U.S. and worries that the Trump administration is still angling for a weak dollar policy to bolster U.S. trade. On the other hand, you’ve got rising U.S. yields and a Fed chair who delivered a hawkish surprise earlier this week during his first public testimony on Capitol Hill.
“There’s wariness that the rise in U.S. yields is mostly a reflection of bad inflation, with widening fiscal deficits sparking massive debt issuances and that’s weighing on the dollar,” Jun Kato, chief market analyst at Shinkin Asset Management said earlier this week, adding that “Powell surprisingly showed his color, suggesting more rate hikes than people currently think with confidence in the U.S. economy, but the dollar’s failure to extend gains shows how demand is stronger to sell the greenback on its rebound.”
Well, Bloomberg is out this morning summing up the views of Stephen Jen at Eurizon SLJ Asset Management and it’s worth at least considering these arguments because Stephen is, to quote Bloomberg, “is well positioned to rebound in 2H, benefiting from its haven status.” Here are the bullet points:
- Market volatility last month was not a one-off event, but rather a precursor of what could happen later this year. The bottom line here is that the stock market doesn’t have the capacity to digest higher rates in the U.S. and around the world.
- And rates will rise as central banks curtail stimulus — which Jen and others put at as much as $50 trillion — in response to rising inflation
- The world may be more sensitive to higher interest rates than some presume. While banks and households delevered after the crisis, corporate debt has increased by $16 trillion EM economies, including China, and by $14 trillion in DM.
- USD and equities should be negatively correlated from now on.
So there you go. You can take that to the bank. Or not. But it is, to quote Bloomberg’s Anchalee Worrachate again, “the big question these days for the $5 trillion a day FX market.”