Chart of the Week - US Dollar Narratives
Everyone wants a big story or narrative, but let's keep this simple...
Chart of the Week - Fed Rate Policy Divergence
The Fed vs G10 Central Banks: I was just working through the (bearish) outlook for the US dollar, and a lot of it comes down to technicals, cycles, positioning/sentiment, and valuations. The problem is inevitably there will be some question like: “yeah but what will replace the US dollar?”
First of all, mine is a cyclical view — I don’t waste my time on grand narrative stories. Yes they make for good traffic-generating headlines, and people like a good story, especially the doomy ones. But I find those big megatrend structural theme stories tend to be useless for actual investment strategy and position taking. And if anything, they often pop up when the cycle is turning in the opposite direction (!)
The other problem (especially when the market view is grounded in charts) is people want to know the story, the narrative, the reason, and if you’re bearish DXY that will generate some type of question along the lines of: “yeah but Europe is stuffed, it has so many problems, why and how could the EUR rally??“
That’s where we come to this week’s chart.
The Fed went earlier, faster, and bigger on rate hikes relative to other G10 central banks (**as it usually does**). This put it out ahead of the pack, and created a large interest differential tailwind.
If you want a macro/fundamental bear story or narrative then think about this: the Fed usually also goes earlier, faster, bigger on *rate cuts* too.
So the key point is the Fed has strayed from the pack, and while that was bullish for a time (and the market usually discounts that in advance), it is now essentially sitting on latent bearish potential in the form of expected policy convergence (eventually the Fed will cut, and delete the interest differential tailwind).
And there’s your macro/fundamental story to the existing and compelling value/sentiment/technical case in the charts.
Key point: The Fed has strayed from the pack; this too shall pass.
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Topics covered in our latest Weekly Insights Report
Aside from the chart above, we looked at several other charts, and dug into some intriguing global macro & asset allocation issues on our radar:
Global Markets Update: price action in equities, currencies, commodities
Fixed Income Charts: US interest rates picture, credit spreads, macro radar
US Dollar Outlook: technicals, sentiment/positioning, valuations, rates
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Callum Thomas
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