One of occupational hazards of being the biggest guy on the block is your lower back on occasion gives out when Shrek-like character roles are requested by the kids in the neighborhood. Granted, some of those kids were in fact just volunteering Dad's service, the end result is still an inflamed spine and greater humility towards your own limitations. To this degree, we share similar sentiments and structure this week with the biggest currency on the block - the US dollar. That being said and echoing our own doctor's intuitions, the writing was on the wall for some time - even if many did not seem to notice or were under the persuasion of another false or convenient narrative.
"With the Chairman on deck tomorrow, we feel it's a toss-up between a ceremonial introduction of a taper or a more definitive timetable to when the Fed will begin curtailing QE. From our perspective, it's mostly a moot point - because we feel the bond market has already accomplished the lion's share of heavy lifting with higher yields through this spring and summer.
With respect to the US dollar, we continue to expect the USDX to make another push lower towards the bottom of its long-term range. At the end of the Fed's previous accommodative cycles (1977, 1994 and 2004) - the dollar has initially come under pressure and tested the bottom of the range. Our comparative profiles of the USDX have been pointing that way since June." - The Third Choir - 12/17/2013
Speaking of convenient narratives, the dollar continues to slouch even lower today in what many would see as result of the strong PMI surveys read in Europe this morning. While it certainly hasn't hurt the trend, the causative truth is likely a longer and more nuanced story and one that doesn't fit a headline or pundits take so neatly. I.e. - do they recall the strong April jobs report this past Friday in the US?
Long story short, the US dollar and the euro - similar to the higher yield expectations in the 10-year this year, have continued to confound participants as the markets move further away from the consensus. Buckling under inflationary tensions at home brought on by the Fed's pivot away from what became disinflationary policy and aggravated by the structural handcuffs abroad that the ECB has constrained themselves with, the currency markets continue to baffle conventional macro reasoning, while imparting downstream inter-market wisdoms that continue to support those markets we have favored and highlighted throughout the year.
