HSBC know exactly what's behind the softer dollar
HSBC reflect on a game of two halves for the dollar
HSBC look at what's been driving the dollar.
"Since the US election, the USD has been involved in a game of two halves - like the Super Bowl. The USD rallied hard from the US election to the end of 2016, on the belief that new policies would boost the currency. But 2017 has seen a USD reversal and a resurgence for many EM currencies. This has been driven both by a shift in rhetoric from the US administration and a growing belief in the global reflation trade.
These two opposing forces - policies that will boost the USD versus the global reflation trend - are locked in a tight battle as we move into "overtime". The global reflation trade appears to have gained the upper hand. Now the market must make up its mind which will win out when the final whistle is blown.
The USD became a politically driven currency after the US election. This regime change led to a strong USD. Another regime shift away from politics and back towards a cyclical or structural global reflation theme would mean a reversal for the USD on a more permanent basis. But we do not believe in this regime shift.
We see US policy gaining more traction in the coming weeks. Meanwhile, we believe the global reflation theme is cyclical rather than structural - it is based on animal spirits rather than an actual improvement in the data. We expect this to run out of steam and create room for the USD to rally again."
One thing that strikes me reading a lot of these bank notes are the emerging market comments that are prevalent in a lot of them.
Scrolling back to Morgan Stanley's note, they're on the case too.
"Emerging market data has continued to come in strong, with data
surprises exceeding those in the developed world, weakening the USD vs EM. For
as long as global market volatility remains contained, such as the VIX
approaching new lows, then this sweet spot for EM will continue."
A simplistic way to look at the EM trade is one of yield, much like we saw before and in the early part of the GFC. Remember when AUDUSD was trading well above parity and you could get 4%+ in aussie bonds, compared to next to nothing everywhere else?
A lot of money sought safety over the crisis and while that's all hopefully in the rear view mirror, we're still in a position where a lot of that money still hasn't really started flowing around chasing better returns. As economies grow and monetary policy settles, we'll start to see the flows moving around too. So, HSBC is spot on when they say there's a battle going on over that very subject.