Dollar risks getting dumped

14 February, 2018

Viraj Patel, Research Analyst at ING, explains that the dollar has started this week pretty much where it left off before the equity market sell-off – on a fast-sliding trend, with global investors showing little love towards it.

Key Quotes

“While today's US inflation report is getting touted as being key for the short-term direction of travel for global markets, we're a bit more sceptical on whether it can actually have a material impact. Even in the event of a strong US inflation print, it's difficult to make a clear-cut case for the $ to rally:

While one would expect a positive US CPI surprise to enact a similar market reaction to that seen after the strong wage growth print in the Jan US jobs report – which saw bond yields higher, stocks lower and the $ up across the board – one could equally argue that higher inflation is merely confirmation of a late-cycle, and slowing, US economy. For a structurally weak USD, we would argue that sentiment over the latter would far outweigh any subtle re-pricing of Fed tightening at this stage of the normalisation cycle. Moreover, higher near-term inflation – absent any fresh positive demand shocks – may bring forward the Fed's rate hike intentions, but do little to change the end-level to which rates will gravitate towards (which matters more for the $).

Statistically, we also note that it's a pretty tall order for the US inflation data to ‘positively surprise’ markets today. While consensus for the headline print is +0.3% MoM, 30 of the 74 analysts polled on Bloomberg are in fact looking for a +0.4% MoM – meaning that we might need to a see a bigger print than this (say +0.5% MoM) to truly surprise markets. Given that this is unlikely, we prefer to focus on core inflation. But here we note that out of the last 20 releases – core CPI has surprised just once.”

“The bottom line is that we think it'll be a tall order for US inflation data today to steer markets away from the USD bear trend story – and even in the event of a positive release, it remains ambiguous as to how investors would react. The latter suggests any $ gains may be quickly faded – while it’s worth noting that our house view for a CPI miss could see USD/JPY extend its slide towards 105.”

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