Market Analysis

USD: One Bear’s View

For traders who think the US Dollar’s recent rally is just a blip, and that a downward trend for the greenback remains the longer-term trend,  the view of Japan’s MUFG Bank may appeal.  MUFG noted that “the US dollar gained again in May, by 2.3 per cent on a DXY [index] basis and followed the 2.1 per cent gain recorded in April,” ascribing “the gain in the early part of May” to “the break above 3.00 per cent for the 10-year UST bond yield” but noting that the greenback also derived support in the second half of last month due to “the turmoil in Italian and periphery bond markets in the euro-zone and additional volatility in certain [Emerging Market] currencies.” Nevertheless the Japanese bank sees “this period of dollar strength as corrective within a longer-term downtrend for the dollar.” It argues that “the scale of dollar depreciation in 2017 was perhaps excessive but the shift away from US assets into non-dollar assets globally has further to run.”

Some traders will agree, other will not but in the near-term MUFG expects the US Dollar to be somewhat less attractive as it expects “a pause in the Fed tightening cycle” arguing that “rhetoric from Fed officials of late suggests there is now a stronger consensus to act more cautiously.” It is MUFG’s contention that “avoiding curve inversion and further turmoil abroad will be reason for the Fed to become increasingly cautious in tightening monetary policy given how far advanced the US monetary tightening cycle is relative to the rest of the world” and also feels “an alarming expansion of the US twin deficit, currently being ignored, has not gone away.” Whether markets as a whole will be of a similar mind to MUFG remains to be seen.

Written by Neal Kimberley, External Currency Analyst.