There's a very short window to bet against the dollar, says Goldman Sachs.

Dow Jones07-11

MW There's a very short window to bet against the dollar, says Goldman Sachs.

By Steve Goldstein

Critical information for the U.S. trading day

Happy CPI day to all who observe. More on that key report in a bit.

Should inflation behave as economists expect, there may be a window - a very brief window - to bet against the U.S. dollar DXY. That's the conclusion of Karen Reichgott Fishman, senior currency strategist at Goldman Sachs.

She says that after surpassing 2023 highs, the dollar has been selling off and may have more weakness in store. "The tactical backdrop looks increasingly friendly for risk and negative for the dollar," she says.

The dollar this year has mostly been moved around by expectations over interest rates, which is shown in this chart that plots the dollar vs. a weighted average of the rate differential in 5-year securities of major counterparties.

That's also seen by looking at the dollar's returns vs. major rivals - up strongly vs. the Japanese yen $(USDJPY.FOREX)$, where rate differentials have widened, and down vs. the British pound $(GBPUSD.FOREX)$, where there's been the least change.

Rates aren't the entire story for the dollar's strength. Reichgott Fishman notes that the second-biggest source of the dollar's gains has been the Mexican peso $(USDMXN.FOREX)$, where the outlook has changed after that country's landslide election.

Reichgott Fishman says the correlation between stocks and bonds has been mostly positive this year - for 21 weeks out of 27 - which she says tends to coincide with the broadest dollar swings. Usually, when stocks and bonds move higher together, the dollar struggles. "This makes it all the more surprising to see the dollar simultaneously hit new highs and reinforces the scope for a tactical sell-off," she says.

For now, there looks to be a narrow path setting up for further relief in U.S. yields and gains for U.S. equities, with few obvious headwinds coming up until mega-cap tech earnings at the end of July. In an environment of lower yields and higher stocks, the dollar typically weakens against most currencies, and is a good candidate to fund emerging-market carry trades, she says.

To be sure, she stresses that the dollar bull story is likely to resume in the second half. Ahead of the U.S. election, there's upside risk posed by the possibility of broader tariffs, especially against the Chinese yuan and other Asian currencies. That's on top of what are expected to be limited cross-border investment flows ahead of the election.

The markets

U.S. stock futures (ES00) (NQ00) were slightly lower after Wednesday's 1% surge in the S&P 500 SPX that took the index to its 37th record high of the year. The gains were so strong that it's possible traders simply priced in a benign inflation report a day early.

   Key asset performance                                                Last       5d      1m     YTD     1y 
   S&P 500                                                              5633.91    1.75%   3.93%  18.12%  25.98% 
   Nasdaq Composite                                                     18,647.45  2.52%   5.90%  24.22%  33.97% 
   10-year Treasury                                                     4.285      -7.90   3.60   40.41   51.68 
   Gold                                                                 2389.2     1.01%   3.00%  15.32%  21.59% 
   Oil                                                                  82.24      -1.63%  5.53%  15.30%  6.51% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

The buzz

The key consumer price report is due at 8:30 a.m. Eastern, and is expected to show a 0.1% monthly rise in the headline and a 0.2% gain for core. There's also jobless claims data and regional Fed speakers on the economics calendar.

PepsiCo $(PEP)$ reported stronger-than-expected earnings, but on flat beverage volumes and a decline in snack volumes.

Costco Wholesale $(COST)$ raised its membership fees for the first time in seven years.

Citigroup (C) was hit with $136 million in fines from federal regulators after it didn't tighten up its standards for managing risk and data quality the way it previously promised.

Archegos Capital Management founder Bill Hwang was convicted of fraud.

Best of the web

The IRS just collected this 'staggering' amount of unpaid taxes from millionaires - and there's more where that came from.

The night President Biden lost George Clooney's support.

France is busing homeless people out of Paris ahead of the Olympics.

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   TSM     Taiwan Semiconductor Manufacturing 
   AAPL    Apple 
   AMC     AMC Entertainment 
   AMD     Advanced Micro Devices 
   KZIA    Kazia Therapeutics 
   NIO     Nio 
   PLTR    Palantir Technologies 

The chart

The AI productivity surge is already here, argue Piper Sandler's Nancy Lazar and Arif Hague, though it's not yet widespread. They show that in a number of charts, including this one showing that information sector employment is down since the advent of ChatGPT. Ex-tech industrial production has been sideways for two years, while tech production has surged, they say.

Random reads

No joke - a Japanese local government passes law requiring at least one laugh per day.

Talk about liquidity - this cash machine was installed on the side of a bridge.

A man was caught trying to smuggle 100 live snakes in his pants.

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-Steve Goldstein

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.

 

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July 11, 2024 06:49 ET (10:49 GMT)

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