Dollar (USD) fundamentals Week 04 2019.

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  • Investor flow remains overall USD negative. USD outflows by real money (RM) investors over the past 3-weeks which follow a long period of net buying. The shift in USD RM flows coincides with the mid-December downturn in USD and more dovish Fed speak. Citi notes the US govt shutdown continues to be one of the factors weighing on USD sentiment (in the short term). Citi.
  • Fed’s responses to macro developments. Markets have moved too quickly to price in economic weakness, and will be shown the error of their ways by a US economy that resisted a meaningful downturn for a fair while longer. After all, there isn’t much in the most recent hard data to support the idea that the economy’s falling off a cliff. Yet, we know that the fault lines for the global economy came from the extended period of super-low rates and growing central bank asset mountains, and that as these were (and still are) reversed, we would see strains in emerging markets first and then, probably, in developed markets. Either way, one of the main takeaways from last week was that the Fed, in particular, is very sensitive to markets and the ‘Fed put’ is alive and well. That will act as a drag on the dollar for now. SocGen.

USD dollar gains expected in the coming weeks but overall remaining bearish throughout the medium term (3 months to 6 months).

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