A Raised Bar?
With the proviso that how the currency market trades in early January is not always representative of how currencies perform over the year, traders may conclude that the hurdle rate for a higher US dollar has been raised given that a more likely response to the unveiling of significant US tax reform, at a time when the US economy already had a very low unemployment rate, might ordinarily have been expected to have prompted a material move up in US funding costs and a bounce in the value of the greenback.
But it hasn’t. So, traders could legitimately wonder why a set of circumstances that might rationally be perceived as US dollar-supportive has proved otherwise. One reason might be that a fall in the real yield of the 10-year US Treasury, as the US yield curve has flattened while US inflation has been ticking slightly higher, has eroded the relative attractiveness of the greenback just at a moment in the global economic cycle when other economies, notably but not exclusively in the euro zone (EURUSD), have shown stronger signs of gaining momentum. Perhaps, the currency market has decided that the US dollar is not the only game in town now that other economies are also now showing signs of expanding at a decent pace.
The arguments for why the greenback has been trading poorly in recent months despite growing signs, that have now materialized, that Washington would pass a sizeable fiscal stimulus will be varied. But it’s arguably almost academic from traders’ perspectives. The currency market is what it is. Traders may not feel the need to overanalyse the situation but could just decide that, at least for now, the bar for sustained US dollar appreciation is presently set pretty high.
Written by Neal Kimberley, External Currency Analyst.