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- Has the strong dollar gone too far?
Has the strong dollar gone too far?
USD taking a breather... But for how long?
Tim Vollans
September 11, 2023 • Estimated Reading Time: 6 minutes
The dollar’s been dominant over the past couple of months, gaining against the Euro for eight consecutive weeks now. But the tide’s potentially turning…
So, one big theme we’ve been tracking for ages is if dollar strength would persist.
Purely based on the dollar smile framework, it made sense that the USD could outperform…
If we see a recession or widespread growth concerns, USD tends to be a safe haven. As it happens, it’s the other part of the smile that has dominated.
The US economy has outperformed. US yields have risen. Those two factors combine to drive USD outperformance.
This week, we’ll see if the ECB can put a stop to the euro slide. Fundamentally, there seems no reason to expect EUR to do any better, but…
a) Markets don’t move in straight lines
b) The US has a deficit problem
c) Everything is relative
Which is another way of saying that the strong USD theme could be overcooked.
Higher yields are great until they’re not. We covered this here a month or so back.
Goldman Sachs traders added some commentary this weekend too
Example A: “The markets are rightfully wondering who is going to be the marginal buyer of incremental government debt, especially when government are going to be conducting fiscally expansionary policy at the current for the next 3-4 years? Also add to that; i) de-dollarization; and ii) “Surplus” countries not trading with a surplus anymore (like Japan and Germany).”
Example B: “The rates market continues to be beleaguered by an onslaught of supply in absence of any meaningful buyers. In addition to the heavier UST supply to contend with going forward, September kicked off with a whopping 58bn in corporate issuance to absorb this week, with another 70bn or so expected for the remainder of the month.”
Keeping it simple, the US is spending loads & financing that by selling a shedload of bonds (increasing the total supply of bonds), while demand is flat or even decreasing.
See, if Germany & Japan are no longer running trade surpluses, they’re not generating those excess savings that (used to) end up in US treasuries.
At the same time, US corporations are borrowing big time, and competing for that same pool of capital.
If supply outstrips demand, the price of bonds goes down (and yields go up).
Over in the East, China’s pushing back forcefully against yuan weakness. Reuters sources say Companies that need to purchase $50 million or more will now need approval from the People's Bank of China (PBOC)
And Bank of Japan governor Ueda looks to be setting the stage for an exit from negative rates…
With conditions:
"Once we're convinced Japan will see sustained rises in inflation accompanied by wage growth, there are various options we can take,"
"If we judge that Japan can achieve its inflation target even after ending negative rates, we'll do so,"
Policy change all depends on sustained wage growth.
Still, the comments drove a bout of yen strength on the open, benefiting Japanese bank stocks for good measure.
✨ So, perhaps enough cross currents to suggest the strong dollar trend is about to take a breather.
We’ll see how long it lasts…
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Can a moving average generate a trading signal?
💡 In a world obsessed with endless complexity, maybe there’s value in keeping things simple?
The Veteran’s whipped out his screens, and found 14 stocks that broke below their 50 day moving average on Friday…
Danaher stands out
Among the 14 S&P 500 stocks that broke below their 50-day MA line on Friday was Danaher (DHR US) which was down by -2.57% on the day and by -6.28% over the previous week.
Danaher was the biggest faller among this group of stocks over both time frames. Very notable because DHR has been a big mover on the upside, posting 23 new highs over the last three years.
However, so far in 2023, the stock has posted 11 new lows.
Medical equipment maker Danaher is transitioning and recently agreed to buy the life sciences business Abcam (ABCM) for $24 per share.
However, it will soon spin out its environmental & applied solutions business (Veralto) under the ticker VLTO.
The market is struggling to reconcile these changes. On one hand, you’ve got the departing value of one business, and on the other the value add (?) of the Abcam acquisition.
In the spirit of keeping things simple, maybe it’s one that’s best left alone…