92.55 up 0.37 last.
From Marc to Market:
US Dollar Recovery Extended
The US dollar recovery that began in North American yesterday continued to in Asia and Europe. The geopolitical anxiety sparked by North Korea's missile over Japan subsided. The US response was seen as measured and tempered. North Korea indicated that the missile test was to protest the annual military exercises of the US, South Korea and other allies in the region. During the military exercises last year, North Korea also protested with a missile launch.Here are the last couple weeks of the Dollar Index via FinViz:
Geopolitical tensions often seem to spur a short-lived even if the sharp reaction in the capital markets. However, recall that the dollar was already selling off before the latest developments on the Korean peninsula. The geopolitical developments accelerated the move, and then the profit-taking was triggered. The Australian dollar was among the weakest of the major currencies yesterday, and today it is the only major not weakening against the dollar.
The Dollar Index reached 91.62 yesterday, the lowest level since early 2015. The 91.20 area corresponds to the 50% retracement of the big rally since the middle of 2014. Our constructive strategic outlook for the dollar was fundamentally anchored into divergence theme, which we think is still intact (balance sheet and policy rates have not reached peak divergence). Our more tactical bearish stance on the dollar was, in part, based on the understanding that the dollar's down move this year is a correction to the rally since 2014. A break of the 91.20 area would suggest the risk of a new leg down to the 6.18% retracement, which is found near 88.25.
The long dollar position was crowded at the end of the year, but now formal surveys, some speculative positioning in the futures, anecdotal stories, the way implied vol moves in the options market, all point to the short dollar position as being overcrowded. In terms of time, we have anticipated a better fourth quarter for the dollar, but we are concerned that the US debt ceiling and spending authorization deadlines looming can weigh on the dollar first.
There is more talk that the strength of the euro could prompt a dovish tapering from the ECB next week. Tomorrow the EMU's preliminary August CPI will be reported. Today the Spanish and German reports warn of upside risks. Spain's CPI rose 0.2% in August for a 2.0% year-over-year pace. It was 1.7% in July, after peaking at 3.0% in February. The German states have reported firmer inflation figures, and the risk is on the upside of the national report due shortly, where the year-over-year rate is likely to rise from July's 1.5%. It peaked at 2.2% in February.
The euro closed last week at $1.1924, according to Bloomberg. It has been dipped briefly below $1.1940 today, after reaching $1.2070 yesterday. The 50% retracement of its decline since 2014 is found just below $1.2170. The consensus narrative of the euro's rally this year emphasizes the disappointment with progress on Trump's legislative agenda and the softer US inflation data. However, the one factor that does not get its fair due, in our view, is changed the political climate in Europe. Specifically, what signaled in the euro's move higher was the gap higher opening on April 24 when it became clear that the populist-nationalist wave was going to be turned back in France.
Last year, foreign investors sold roughly $100 bln of European equities. This year European equities have been a market favorite, and roughly $30 bln has returned. Yet the equity performance has been disappointing. The Dow Jones Stoxx 600 is up about 2.4% year-to-date. The real return for foreign investors comes from the dollar's slide. For dollar-based investors, the Dow Jones Stoxx 600 has returned 16.3% this year, compared with a 9.3% return for the S&P 500....MORE