Bloomberg’s macro strategist Mark Cudmore believes the stars are aligning for the Dollar’s ‘summer of love’.
The Dollar just broke above its 200DMA…
Whether the dollar ultimately goes on to test the 2017 highs may be a completely different issue, but the stars are aligned for recent dollar appreciation to sustain for a few months. Here are 10 reasons why the dollar will strengthen this summer…
1. Tuesday is expected to bring confirmation that the U.S. April manufacturing PMI was at a multi-year high. In February, the ISM equivalent — also out Tuesday — printed at the loftiest level since 2004
2. Factory owners are confident this year because the U.S. economy is indisputably strong, whether growth has peaked already or not. February industrial production saw the fastest annual increase since 2011.
3. Add in an outstanding U.S. earnings season that’s making equity valuations more attractive, and it’s clear that the U.S. is relatively fertile ground for putting cash to work.
4. This is happening amid a clear growth slowdown in major developed-market alternatives, notably the U.K. and Europe.
5. Note also that the rise in U.S. yields has been significant enough to start attracting unhedged inflows into Treasuries.
6. That’s important because it has seen the dollar begin to recorrelate to U.S. yields in the last month, just as there’s been further domestic pressure on the U.S. sovereign-debt market from increased issuance.
7. The dollar offers the highest FX-implied carry of G-10 currencies and that’s hard to ignore.
8. This positive growth and yield story isn’t new, but the positive divergence from large liquid peers has widened at the exact time the narrative around trade is evolving to be perceived as more likely to be beneficial for the U.S..
9. The U.S. administration is being consistent in its hardline message: either it gets most of what it wants or it will disrupt global trade. Either outcome will boost the dollar in the short-term.
10. And all this is against a backdrop of a fast-money investor base that has spent the last few months getting themselves short the dollar.
And in case that was not convincing enough, here are BofAML’s 8 reasons for selling EURUSD now…
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Continued soft Eurozone data in April discredits the “bad weather” theory but lends support to the “euro is too strong” theory.
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In the US, the recent upturn in business investment is paving the way for higher productivity and wage growth.
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A NAFTA deal over the next few weeks should increase US leverage in trade negotiations with China.
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Corporate America may use the Q1 earning season to repatriate their offshore cash.
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Continued Chinese deleveraging will limit the ability of the PBOC to match further Fed hikes.
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The flatness (steepness) of the US (Eurozone) yield curve means foreign investors will only consider currency unhedged (hedged) investment in US (Eurozone) bonds.
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The fiscal risk premium in the USD is already very high.
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Divergence between momentum and positioning are turning the tables on overextended EUR longs.
And EURUSD broke below its 200DMA…
Everything is coming together for a summer of greenback gains.
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