💵 Why is the dollar so weak?

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Judging by my DM's, there's some confusion about why the dollar has been tracking weaker lately. All we need is the dollar smile 👇

For most of last year, the US economy was the big outperformer. Europe and Japan were struggling with high energy costs, and a higher risk of recession.

The US economy was going great guns internally, and they got to export loads of high-priced energy as well. To top it off, the Fed was set to hike rates to a juicy 5%+, which pushed yield differentials wider at the time.

All of which put us firmly in the top half of the smile, which is USD positive...

Then energy markets calmed down. US growth became old news and everyone started looking at China and the reopening trade. A quick look at China's stock markets should tell you that we've quickly priced a lot of that optimism in. Europe is hoping to benefit too.

In fact, it's this general normalisation of global trade and the global economy which has been the biggest driver of dollar weakness.

Yield differentials have narrowed as the US nears the end of the hiking cycle and others catch up, both from a rates perspective and the economic viewpoint.

We're going for the Goldilocks/soft landing narrative by the looks of things

But it's hard to call that as the ongoing base case. Microsoft's guidance last night was a perfect example of why. A truly global company is guiding growth lower.

They're not forecasting disaster, but it's clear that the pressures are there. CEO Satya Nadella laid it all out in the earnings call.

'Optimised spending' = corporate speak for spending less (or demanding more for the same spend)

None of this is especially indicative of positive growth. Focusing on the long-term and really helping customers understand the value proposition is (at least to me) code for 'sales are getting harder to close'.

Again, there shouldn't really be too much unexpected here. Growth is expected to slow. The better questions are 'by how much?' and at what point does everybody panic?

That should be the point that the dollar strengthens again and we move into the top left of the smile.

We still think the most likely trigger is when employment really turns. For now, it's mainly tech companies (that overhired) plus some other pockets, such as Ford cutting jobs, or 3M slashing 2,500 roles.

All the signs of a slowdown are in plain view. The recession question is probably when rather than if, yet apparently people are looking at cosmetic surgery rather than jobs data for a sign of when that happens...

Such desperation for answers outside of convention is perhaps driven by the contradictory insights of recent labour data 👇

• The unemployment rate matches a half-century low, at 3.5%

• Monthly job gains have lately still been exceeding 200,000, well over what’s needed to absorb entrants to the labor market

• There are still more than 10 million unfilled jobs

• At the same time, December marked the fifth straight monthly decline in temporary help — a segment of the labor market that’s first hired in good times and first fired in bad

• Hours worked have declined since last February, another sign of easing demand for labor

How analysis of nosejob demand or trends of men buying underwear adds to that picture is beyond me...

K.I.S.S