The U.S. dollar got smacked overnight for -0.70%. Is this the beginning of the end for the Dollar? Maybe, maybe not, but our call has been that the USD has more risk on the downside as we wade thru the slowing of the U.S. economic cycle. We were bullish on the dollar back in the spring and thru the summer (I’ve got the time stamped emails to prove it), as there was big flight of capital out of emerging markets, European, and Asian currencies as their cycles were breaking bad. That left the USD as the only safe haven instrument in the currency space – Remember the U.S. economy was still in an expansion cycle in GDP/Inflation/ and Corp profits and earnings. Looking forward, the dollar looks to have direct competition for it’s “flight to safety” status, in the likes of gold, fixed income via treasuries, eurodollars, FF futures etc, (although the rally’s have been shallow, we think that’s going to change) and utilities – not to mention when the Q4 data begins to be reported “less good” on a y/y basis – and perhaps the Fed takes it’s foot off their “hawkish” stance on interest rate policy, which we also think is a likely scenario.
Remember this correlation:
Dollar down = Interest rates down = Gold up …… And gold is certainly up this morning. Safe to say at the moment that we hit this one on the “screws” yesterday.
The last component to this mix is the “down interest rates” component, which we believe will manifest soon. Remember, the Fed is always its most hawkish at the peak of the cycle – and they’re still hawkish today. Eventually the bond market will begin to sniff this out and start coming our way. Friday’s Unemployment number may mark the beginning of the end for the “rising rates” call that CNBC had the entire world freaked out about (including some of you). Friday’s jobs number should be good on margin, and we should also see very heady wage growth as well – wage growth for this number on Friday is comparing y/y with a very weak number! Which is why we’re expecting another acceleration and why the bond market hasn’t come our way yet despite the correction in stocks. BUT, with headline CPI slowing – we believe this will change soon.
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