• 346 days Will The ECB Continue To Hike Rates?
  • 346 days Forbes: Aramco Remains Largest Company In The Middle East
  • 348 days Caltech Scientists Succesfully Beam Back Solar Power From Space
  • 748 days Could Crypto Overtake Traditional Investment?
  • 752 days Americans Still Quitting Jobs At Record Pace
  • 754 days FinTech Startups Tapping VC Money for ‘Immigrant Banking’
  • 757 days Is The Dollar Too Strong?
  • 758 days Big Tech Disappoints Investors on Earnings Calls
  • 759 days Fear And Celebration On Twitter as Musk Takes The Reins
  • 760 days China Is Quietly Trying To Distance Itself From Russia
  • 761 days Tech and Internet Giants’ Earnings In Focus After Netflix’s Stinker
  • 764 days Crypto Investors Won Big In 2021
  • 765 days The ‘Metaverse’ Economy Could be Worth $13 Trillion By 2030
  • 766 days Food Prices Are Skyrocketing As Putin’s War Persists
  • 768 days Pentagon Resignations Illustrate Our ‘Commercial’ Defense Dilemma
  • 768 days US Banks Shrug off Nearly $15 Billion In Russian Write-Offs
  • 771 days Cannabis Stocks in Holding Pattern Despite Positive Momentum
  • 772 days Is Musk A Bastion Of Free Speech Or Will His Absolutist Stance Backfire?
  • 772 days Two ETFs That Could Hedge Against Extreme Market Volatility
  • 774 days Are NFTs About To Take Over Gaming?
Another Retail Giant Bites The Dust

Another Retail Giant Bites The Dust

Forever 21 filed for Chapter…

The Problem With Modern Monetary Theory

The Problem With Modern Monetary Theory

Modern monetary theory has been…

  1. Home
  2. Markets
  3. Other

The Dollar's Perfect Storm

"Meteorologist see perfect in strange things, and the meshing of three completely independent weather systems to form a hundred-year event is one of them. My God, thought Case, this is the perfect storm." - Sebastian Junger, The Perfect Storm

Perfect Storm

Far and away the biggest thorn in a reflatationist outlook has been the stalwart strength of the U.S. dollar since last July. Nautically speaking, it's been an everlasting red sunrise on the decks of those participants looking to navigate the narrows of the lost reflationary straits. Swiftly dumping the wind out of the sails of commodities and inflation expectations as they tacked higher in the first half of 2014, the thesis trade once again rolled over in heavy waters as rogue waves from the dollar surprised out of the southwest and made a strong move towards shore.

While the dollar found its sea legs at the top of the previous reflation cycle in the spring of 2011, it treaded water in a narrowing range for the better part of two years, alternating listless runs with the euro as both currencies floated towards a denouement in the third quarter of last year. Waking from its range with a thunder clap as the euro sank like Jonah - cast overboard and into troubled waters; resistance has been futile as the dollar has drawn broad support from the differentials in monetary policy, economic data and future policy expectations in the U.S.

Over the past few months we've contrasted comparative studies of previous deflationary (08/09') and disinflationary (85/86') markets, as the current trend attempts to exhaust. With the major central banks in the world making their respective policy pivots in the face of varying economic growth and with underlying disinflationary conditions broadly prevalent, conditions for the perfect storm in the dollar came together as rate hike expectations have continued to rise at home, Japan pauses and reflects on previous accommodations - and as Europe and China ease monetary policy once again. The net effects in the currency markets have provided a gale force wind behind the dollar, a listless drift in the yen and a swooning euro that has yet to find much traction, as it has in the past with major ECB initiatives intended to restore confidences in the eurozone.

With an echoed refrain of conditions witnessed in the summer of 2008, the moves in the dollar and euro since last summer had similar seasonal instigations with disinflationary cascades lower in commodities, yields and inflation expectations. However, it should be noted that during the financial crisis, conditions were broadly flamed in a risk-off environment - with the yen taking the safe have pole position and sharply bid higher. As mentioned in previous notes (see Here), this dynamic is diametrically opposite of the kinetic drive of the current market, which has generally been nurtured in a risk-on environment, with the dollar acting as its primary soldier of fortune and the yen playing possum in another round of carry the leader. In this regard, there are similarities in the currency markets with the buoyant conditions of the mid to late 1990's, where the dollar led the U.S. equity markets higher as traders piled into short positions in the yen, further dampening inflation expectations downstream.

While it's certainly an understatement that the dollar continues to exceed most upside expectations, similar to the summer of 1998, conditions are ripe in the currency markets for a significant reversal of trends. From our perspective, we're still of the opinion that old testament teachings will be taught, as we expect Jonah, the euro and yen to re-emerge from the whale.

For a chart series of referenced work, as well as other comparative studies, see Here.

 

Back to homepage

Leave a comment

Leave a comment