We have been expressing our puzzlement at the Dollar’s decline in late December and early in the New Year given the strength of the US stock market, the rise in yields across all parts of the maturity spectrum, the passage of a historic tax reform bill and the prospects for upward revisions to growth forecasts in 2018.
Perhaps, we might be allowed to set humility to one side and repeat what we said here last Wednesday: “For the moment, it seems just that the dollar is falling because it is falling. The technical tail is wagging the fundamental dog. When price action itself is such a dominant feature of trading, investors seek confirmation of the prevailing trend by seeking out the bits of news which support a continuation of the move rather than viewing the incoming information more objectively”.
We repeat these comments because having noted that January 3rd 2017 marked the turning point for the USD last year, the same date in 2018 has so far marked the low point for the USD after its latest sell-off. Its index against a basket of major currencies reached a 14-week low of 91.44 last Wednesday Jan 3rd. Friday’s low was 91.50, Monday’s was 91.56 and from that point it has moved steadily higher to make it back on to a 92 ‘big figure’ for the first time in more than a week. On Tuesday morning in New York it reached 92.27 and though it is too early to say with confidence that a decisive turning point has been made, the USD bulls are winning the argument in the near-term.
US 10-year Treasuries now yield more than 2.50% for the first time since March last year, rising 6bp yesterday to 2.54%. The yield curve from two to 10 years steepened by 5.4 basis points, the most in over a year, to 57.4bp. For the moment, stock markets have shrugged off this development but don’t be surprised to hear it as an explanation the next time that equity indices end lower. And on that subject, a fascinating study from BoA Merril Lynch shows that, “Since March 16, 2016, the S&P 500 has gone for 386 trading sessions without a 5% drawdown. If the trend persists, in just 10 more days this will be the longest stretch without such a drawdown in history.” Wow…
The US Dollar index opens in Asia this morning around 92.20.