The US dollar (USD) has been in a bull trend since 2018. But in recent weeks, I was alerted by my former trading partners in Singapore that there is technical signal which suggests that just changing. High beta currencies, like Australian, Canadian dollars, Norwegian krone and more recently Sterling are part of this movement. Most emerging market currencies are also strengthening against the USD. Forward points for the Hong Kong dollar continue to pare down and Chinese Renminbi (RMB) strengthening for the fourth consecutive session as it slips through 7.10 mark to unwind most of its recent rise. The JP Morgan Emerging Market Currency Index has been rising for the 10th in the past 12 sessions.

Since his election in November 2016, President Trump and Treasury Secretary Steve Mnuchin, have been consistently advocating for a weaker USD, partly because to make US products more competitive in global markets and partly a useful trade negotiation tool with countries worldwide.

To-date, USD has been a very strong currency due to support from Fed’s massive liquidity injection. With the recent weaker US dollar, to a certain degree, it reflects a good possibility of capital flowing out of US as confidence slowly returns in the world, one can sort of drag some of that money out of super safe havens. Also, I noted that Fed’s liquidity flows are quietly fading. From an initial US$75 billion injection per day when the Fed announced the launch of Unlimited QE in mid-March, the US central bank has reduced its daily buying to US$60 billion per day, then announced a series of consecutive ‘tapers’. It also shrinking average daily POMO to US$5 billion last week, in its latest just published schedule and would in the coming week, to purchase ‘only’ US$4.5 billion per day.

If this levee is structurally breaking, other key major-standing trends like bear trend in commodities since 2011, reversal in fortune of US bond and global equities market will be part of this changes as well. As USD being the undisputed world's reserve currency, the buck tends to set the stage for both sentiment towards risk assets and affects the relative risk-return of those assets versus each other. Growth versus value equities investing are likely to reverse as well as a strong USD does indeed favour growth over value for the most part. Bonds may not work as a hiding place against risk assets in the next materially declining USD phase.

My view is that rising likelihood of further escalation in US tensions with China and Iran, the USD’s ascending price channel is unlikely to be challenged, supported by relative divergence in monetary policy that is in favour of the US against rest of the world. It will continue to remain as a safe-haven from potential more enduring Covid-19. On a relative basis, the USD has more safe-haven appeal compared to the JPY and the CHF. I termed this development as a correction that is generally occur over very short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.

Chee Seng, Wong
CIO, Athena Advisors
wong-chee-seng@outlook.com