There's a change a foot for the U.S. dollar and like other
major trend shifts in the direction of the "greenback", this is
not expected to be a short term move, nor has this change taken
place overnight. The impact for commodities and emerging markets
could be dramatic.
The USD is now rallying in risk off and risk on environments as
we view correlations that are well entrenched from the early days
of the financial crisis breaking down. The dollar is
rallying not just as a "risk off reaction" but also even as parts
of the global economy are recovering. And while Europe is
far from solved, and Chinese growth remains a major question
mark, the world is better.
The price action we are seeing in the dollar is fundamentally
different than what we have seen in the last 5 years.
Like structural dollar moves over the last 50 years, this
trajectory change in the USD has taken 2 years to establish its
new path, and it will be a theme for global investors well beyond
the next two years.
The dollar broke the bear trend in 2011 with one last thrust
to the downside before a period ahead of consolidation and basing
that lasted through the Fed statements of last summer and
fall. Now it's clear that the Fed has maxed out on
monetary policy and dovish comments.
The other fundamental factors at work that are part of the
short term Dollar support include policy changes in Japan,
Europe, and even China. Look at the chart of USD/YEN and
this tells you something much bigger is foot on the USD, not just
Italian elections and Draghi comments signal that European
Union (EU) tightening is not happening soon and that EU
referendums coming back en vogue. A quick look at the
commodity currencies (AUD, CAD, ZAR and MXN) tell you China is
not able to recreate the same commodity demand backdrop that
drove demand past the '08 crisis, well into the peak of these
currencies into 2011, 2012.
U.S dollar moves are 5-10 year events that incorporate yield
differentials, policy changes, and global growth dynamics, thus
then dictating capital flows, and macro speculation. We are
seeing capital flows and macro speculation in the last 3 weeks
that are telling a big story, beyond the Fed potentially taking
away the stimulus punchbowl.
Japan is mired in deflation, Europe will be battling austerity
and drag from the periphery, the U.K. is battling a housing
bubble still, and China is battling how to ever balance its
social fears with a planned economy that isn't really serving the
The Dollar has already had an appreciable move higher (+5%) in
the last month, but most investors have not noticed because the
US stock market has been going higher and industrials have done
If the Dollar continues its path higher, we know that Emerging
Markets and commodities will be heavy, but also be wary of the
impact and drag on U.S. multinationals and even higher growth
linked U.S. equities.