The Return of the Prodigal Dollar
Let’s get intimate with the USD
It may come as a surprise for many of you, especially for those investors that don’t look at the macroeconomics around the world, but guess what… Every investor and fund manager wants exposure to the Dollar.
There is this broader move in the market toward Dollar exposure as traders are turning net bearish on some other major currencies.
Looking at these charts, you can notice the outflows from GBP and EUR. But why would all this money go into USD?
Let’s make two things clear here.
Firstly, as investors pulled out money from GBP and EUR, they may have also increased their short position on these currencies. Therefore, the above charts don’t represent only outflows.
Secondly, not all the money went into USD bullish bets. There is also a growing optimism toward emerging markets due to the energy crisis. As electricity and natural gas prices increased around the world, investors started to look at emerging markets for oil and natural gas exporters. For example, the Russian rupen outperformed all other major currencies last month, followed closely by the Colombian Peso.
We will focus mainly on the dollar in this article.
ECB is lagging on ending its QE. The euro has fallen 2% against the greenback over the last month.
Although, BoE started the taper and is throwing hints about a potential rate hike this year to keep inflation under control, the UK is facing some major macroeconomic difficulties due to its Brexit accord and workers shortage.
There are talks that compare the Pound with emerging markets currencies and others called the Pound unpredictable. Despite a possible rate hike, the Pound continued to fall.
Governor Andrew Bailey warned of a potentially “very damaging” period of inflation unless policy makers take action. Bets against the pound are intensifying amid speculation that any Bank of England efforts to curb inflation would darken the outlook for growth and consumer sentiment.
Money markets increased their expectations for BOE tightening this week, anticipating a 15-basis-point increase in December and another 50 basis points by June.
That would bring the central bank’s key rate to 0.75% from 0.1% currently. Yet the prospect of several rate hikes is raising concern that rapid policy tightening will hurt confidence among consumers already grappling with soaring energy prices and supply chain disruptions.
On the other hand, the Dollar looks attractive, sitting at its lows. With the Federal Reserve taking a hawkish stand and being ready to stop the stimulus era, the yields start to push up. This move makes bonds more attractive to investors who will need some dollars to buy them. While Europe is fighting the energy crisis, the United States seems to be better prepared for the winter.
To conclude with, as money went out of EUR and GBP, we strongly believed that most investors ran to make bullish bets on USD and secure high yields on bonds, as the Federal Reserve turned hawkish. Also, there are strong arguments to justify a move of capital in oil and natural gas exporters from the emerging market spectrum.