Dollar bulls remain in charge, but we think that will change soon. According to our economic cycles model, we’re expecting a bottom turn in inflation, while U.S. headline growth continues to deteriorate in oncoming quarters. This style of an economic environment has not been typically been favorable for U.S. dollar bulls. Why? Because largely within this type of economic environment you start to see the beginning stages of a “dovish” pivot by the FOMC (which began in Dec and the Fed doubled down on this view in Jan). Easy, or easier monetary policy almost always has a negative effect on that host countries currency, or in this case the US.
What caused the 2018 USD Bull Market?
Looking back, the USD is coming off of an almost uninterrupted 8% (nearly 800 bps) rally that began on April 16th 2018. This was largely due to the capital flight and subsequent collapse in emerging market economies that had begun at the turn of the year in 2018. Moreover, the USD’s counterpoint, the euro, has had its own trouble. The eurozone, has seen a broad slowdown across the region in industrial production and other key economic activity indicators. Italy’s economy has officially tipped into a recession following a recent GDP figure suggesting the Italian economy shrank by -0.2% in Q4 2018 and -0.1% in Q3 2018. The eurozone economic troubles have largely kept the USD in charge in the currency space by default, as Euro continues to struggle. However, we share the opinion along with many other industry titans, that we could be in the beginning stages of a recovery in Emerging Market economic activity. Over the near to intermediate-term, we think the USD trading action will largely be sideways with a bearish tilt (I hope that make’s sense to you). We say this simply because of the dire condition of the Euro currency at the present moment.