As I was looking at CFTC data yesterday for the thoughts on 10yr futures, I looked through the other products. There were no strong signs that I could see in these products. I was especially surprised there was no strong sign of hatred of the dollar
After all, if you read LinkedIn or Twitter, the imminent demise of the dollar is pretty clear. After all, China is trading with other countries in RMB instead of the dollar right?
On the chart today I show a few things but the dollar index is in white and is the inverse. You can see that it hit a peak in 2022 not seen since 2002. For all of those who think the dollar is no longer in demand, even after recent weakness it is still near 20 yr high in strength
I was surprised that there weren't more shorts because one of the reasons I posited on 10yr short was nervousness over the debt-ceiling stand-off. One would expect if this was a reason, we would see it in the dollar products. I did not
So what other reasons can there be? I can think of a few but I want to show you two of these today - interest rate differential and relative growth rates
The first is interest rate differential. I show the spread between Bunds and Bonds as Europe/US comprise more than 90% of reserves. Bunds are the investment vehicle of choice in Europe. You can see this spread tightening further as it was strongly favoring the dollar at one point.
It has gotten a little disconnected in the last 5 years with QE forever in Europe and attempts to get off that in fits and starts by the Fed. At this point, we seem to be settling back in and this spread points to a still lower dollar as the rate differential no longer favors the greenback
The other is relative growth rates. Here I show the PMI ratio between China and US, the two largest economies. When growth is higher outside of the US, money tends to move abroad. When relative growth outside the US is slowing, money tends to be drawn to the US
The US serves as the defensive country/sector of choice for global investors. I know this feels like heresy to say given the high valuation in the US. However, have you looked at the valuations of defensive stocks within the US like PG, CLX and KMB? Investors have been hiding
This ratio has been trending higher the last 12 months and now sits at a 10yr high. We can debate the pace and depth of any US slowdown, with some saying we have already bottomed and others saying there is worse to come. However, it is clear China is now doing a lot better
There may be reasons to sell the dollar right now. Replacing it as a reserve currency isn't one of them, yet. Nor does it seem to be the debt-ceiling debate though it looks like you get that free option because you can be short on rate differential or relative growth and get the debt ceiling stand-off as a freebie
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