Cool Video: Dollar Drivers on Bloomberg

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Marc Chandler
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I had the privilege to be at Bloomberg today and discussed with Vonnie Quin and Mark Barton. A clip to the Cool Video can be found here.

There were three talking points. First was the observation that while the President took credit for the record stock market, the strength of the economy, the low unemployment rate, and business confidence, there was no mention of the dollar, which poised to close lower for its seventh consecutive month.

There have been no fresh legislative initiatives, and although many executive orders have been signed, the economic performance appears to be largely doing what is has done since the middle of 2009. Moreover, the IMF recently revised down this year and next year’s GDP forecasts for the US. The continued improvement in the labor market seemed to well in tow last year.

The rise of the stock market seems to be a function of broad considerations. Earnings growth in Q1 and Q2 helped, but the underlying driver seems to be low interest rates and share buybacks. Many economists, and some Fed officials are concern about the heights the stock market has reached on valuation grounds. The risk of seeing equity gains are a a favorable assessment of a particular official is what happens when the market corrects, which it eventually will do. Earlier the rising dollar was cited as a vote of confidence.

The second talking point was about the ECB.  At the press conference following the recent ECB meeting, when asked Draghi indicated that officials were aware of the euro’s rise. At the time, we noted that it was not much of a protest. The market realized this and continued taking the euro higher. If the euro continues to rise, is beyond $1.20 at the September ECB meeting, and the pace appears to be accelerating, Draghi may be more forceful. This may be more difficult to signal especially if the ECB also announces that starting next year, it will reduce the amount of assets it buys.

The third talking points was this week’s MPC meeting. I suggest there may be a trade off between the vote on rates and the Quarterly Inflation Report, which is released at the same time. If Haldane who has warned he may favor a rate hike, does make good on threat, I suspect that Carney would seek to soft the blow by having a more dovish inflation report, that would play up the transitory factors (oil and past slide in sterling). On the other hand, if Haldane continues to vote with Carney, then the statement can be more hawkish. I suggest that sterling’s strength is being exaggerated by the dollar’s weakness and that sterling remains weak against the euro.

In the big picture, I suggest that while the dollar is likely to weaken further, I continue to view the gains as corrective in nature, after the large rally since mid-2014. I still do not think we have seen peak divergence and neither the euro, sterling, other major currencies, and the Dollar Index, have surpassed levels that are commonly associated with technical corrections.