Another Way to Look at the Dollar

The US dollar is inextricably linked to the Fed, or is it? The greenback was the laggard on Thursday after the FOMC Minutes, but we look at how ignoring the whims of the Fed paints a compelling underlying picture of the dollar. Australian home loans highlight a quiet end to Asia-Pacific week.  Ashraf's Premium Insights service went short on a currency pair, with a 73% winning record since 2011. The trade has been filled and is now in progress.

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What if the Fed isn't the major driver of the US dollar? Every report we read is hyper-analytical of every word from anyone at the Fed. The narrative of September in markets was will-they-hike-or-won't-they. The thing is, it's impossible to explain market moves since August with such a focus on the Fed.

A better narrative is this: 1) The US economy isn't as robust as believed or hoped. It's a 2% economy not a 3% economy and recent data underscores it with strong dollar headwinds still in the pipeline. 2) Emerging market growth has stumbled, especially in Latin America. 3) China's slowdown is evident but not its extent as it's such an opaque economy to the extent of triggering more fear/risk aversion than would normally have been justified.

The US dollar was already on its way to topping before the events of August/September. Ashraf had mentioned it two months ago on Twitter and on this website (see tweet above) when it was popular to predict a higher USD and a Fed rate hike.  Manufacturing and capex numbers were softening but when China revalued it created fear elsewhere and a flight into the safety of US dollars. That was directly competing with the softer US outlook/Fed and the push-and-pull sparked volatility, uncertainty and even more risk aversion. A second wave hit around quarter end on window dressing.

Now the smoke is clearing on the emerging market confusion. Growth has slowed but it's not as bad as feared and China has plenty of ammunition to stimulate its economy. That leaves the theme of less-robust US growth and the safe haven flows into the US dollar will slowly reverse and that will be what leads to the kind of steady US dollar selling we saw in New York trading today.

The Australian dollar is especially well-positioned to benefit. We wrote about how October is the best month seasonally for AUD and it's climbed for seven consecutive days. Impressively, today it erased an earlier loss to close near the highs. In fact, today's Premium trade is related to a commodity currency.

The focus will remain on AUD and sharpen at 0030 GMT with the release of August home loan data. The consensus is for a 4.7% m/m rise.