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.
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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
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-Steve Goldstein
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July 11, 2024 06:49 ET (10:49 GMT)
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