I haven’t seen a better summary in six bullet points of what’s happened in the market this year than Deutsche Bank today. They highlight what has kept the dollar strong this year.
- The dollar has outperformed this year on a very big widening in US – global growth differentials and high real rates.
- It is not just fiscal policy that is driving this, Fed tightening pass-through into the economy is much weaker than elsewhere.
- Eventually there will be a (mild) recession and Fed easing but when? Risks are Fed cuts come after others and dollar stays stronger for longer too.
- EM central banks are already cutting. Antipodean economies most likely to cut first in G10, followed by some European economies. We are still debating the Fed – ECB gap.
- When the BoJ decides to hike it will have to go fast. This implies an inverted v-shape in yen crosses.
- It’s not the USD but the CNY that has lost reserve status.
DXY daily
The dollar index is retracing at the moment as the idea of an ongoing hiking cycle into 2024 fades due to higher long-end yields but the real question is when the Fed starts cutting. The Fed funds market is pricing in 79 bps of cuts next year but that’s highly contingent on what happens next in the economy.