What it all boils down to in the currency space is the USD (+0.62% this morning) continues to be the “cleanest” pair of dirty underwear in the drawer. It’s honestly as simple as just about everything else, the world continues to slow at a faster pace than the U.S. More European data releases in the overnight continue to show a multitude of problems across the European region, in the likes of France, Germany, and Italy. Furthermore, yesterday we received the U.S. budget data that ballooned to 205B in deficit spending, +52% compared to last year at this time.The idea that the “Twin Deficits” via the fiscal deficit (domestic spending) and Current account deficits (imports vs exports), that are both running in the “red” for the US has largely been the bear case for the US Dollar for quite a while now – and at some point this will matter, but clearly not at the moment as other mainstream economies around the world continue to slow at a faster pace than the US. Remember, Q4 2018 data releases don’t begin until January / Q1 of 2019.
This is when we believe the bull case for the U.S. dollar begins to show “cracks in the ice”. One of the main beneficiaries of the dismal state of the U.S. twin deficits, we believe will likely be the Japanese Yen. We’ve heard some inklings out of the Bank of Japan recently that their long running “easy” monetary policies are beginning to have a negative impact on the Japanese economy and that they may have to begin playing catch-up with the rest of the Worlds tighter policy outlooks. We have no hard evidence of such a pivot by the BOJ, but we do believe based on recent speeches coming out of Japan’s Finance Minister Aso may warrant a slight turn in the BOJ’s monetary efforts at the BOJ meeting next Thursday, Dec 20th. Coupled with the USD and the Fed perhaps taking a more “wait and see” approach to additional rate hikes, trying to get the timing correct on this call will of course be the hardest part. In the meantime, the trend remains your friend in the USD vs Yen pair trade. Stay tuned for more updates.
U.S. Dollar Index Weekly Chart