Snapshot

EMD Relative weekly notes: Week Ending January 15, 2021

Weak dollar symmetries and retracements

  • After a rapid fall, the dollar has retraced some ground. Some punditry suggests this means the dollar's fall is over, but this initial move down is remarkably similar to the last steep fall which started in 2002.
  • The US twin deficit deterioration remains very firmly in place and central banks are similarly inclined to let loose monetary policy continue in an uneven recovery. Therefore, fundamental drivers for a meaningful reversal seem scant.
  • We would view a "taper" move by the Fed as a significant cause to re-think. While there has been some discussion of this, we believe it is very premature and unlikely to drive markets for most of this year at least.

We have to go back to 2002 for the last sustained dollar bear market. In that period, the first move down before a correction was just over 13% in seven months (see Figure 1). The recent drop has been almost identical, over only a slightly longer period. Current positioning surveys suggest the short dollar trade is likely over-extended, so a retracement should not be mistaken for a fundamental shift. In 2002 that retracement was about 4%, today it has been around 2% to date.

Figure 1

EMD_Weekly_Blog_Image_1_1.15.2021.png

Source: Bloomberg, as of January 13, 2021. The chart measures the DXY US Dollar index. This data is for the period of January 1, 2000 through January 13, 2021. Past performance is no guarantee of future results. Performance for other time periods would differ.

Figure 2 shows the deterioration in the US trade balance – a level last reached around the dollar lows of the mid-2000s. With the level of fiscal deterioration set to accelerate as well, ingredients that are very similar to the previous multi-year period are well intact. The combination of these fundamental factors and similar price moves suggests any retracement is more likely to be short-lived than any indication that the dollar weakness has run its course.

Figure 2

EMD_Weekly_Blog_Image_2_1.15.2021.png

Source: Haver, as of November 30, 2020. The chart measures the US Goods and Services trade balance. This data is for the period of January 1, 2000 through November 30, 2020. Past performance is no guarantee of future results. Performance for other time periods would differ.

This week some Fed-speak has sparked a notion that the Fed might taper its balance sheet growth while keeping rates at zero. Given the 2013 experience of a rise in the dollar, such a move would cause a re-think. However, given continued weakness in employment and a sluggish rollout of vaccines we are likely months away from contemplating such a change.

The views and opinions contained herein are those of Schroders’ investment teams and/or Economics Group, and do not necessarily represent Schroder Investment Management North America Inc.’s house views. These views are subject to change. This information is intended to be for information purposes only and it is not intended as promotional material in any respect.