Deutsche Bank is out with a note and it illustrates the big question on the US dollar: “As long as the dollar remains a high-yielder,
there is very convincing evidence that it stays strong,” writes George Saravelos.
But as the chart above shows, it’s priced to fall below AUD, NZD and GBP.
“This would be a material development and in our
framework shift the dollar into a much more bearish regime,” he writes.
He’s skeptical of this pricing, citing:
- Low interest rate sensitivity of US economy
- US growth outperforming expectations, unlike China and Europe
- Rising unemployment despite growth due to immigration (positive supply shock)
- Widening gap in neutral rates (r*) between US and Europe favoring USD
- US fiscal policy expected to remain easy regardless of election outcome
- doubt US terminal rates will fall below structurally impaired economies (UK, NZ, Australia)
In the short term, the big question is the Fed’s strategy and how aggressively they will ease. If they decide to rapidly cut and make rates stimulative, it would cause USD weakness.
The takeaway here is that the market is really focused on Powell and what he signals in terms of willingness to cut.