This note was originally published May 17, 2013 at 14:17 in Macro
It’s no secret that we like #StrongDollar. Historically, strong dollar periods have been characterized by lower commodity inflation, low energy prices, rising confidence and strong consumption growth.
The Dollar is a causal factor in our model and our StrongDollar call over the last 5 months has backstopped our expectation for Gold and Commodity deflation and rising consumption as purchasing power benefits and discretionary share of wallet gets a boost.
Year-to-date, we’ve seen the $USD march interminably higher alongside declining federal profligacy, improving domestic macro data, increasingly marginalized Fed policy, slower EM growth, emergent European dovishness and explicit Yen debauchery. We expect the dollar to continue to benefit from a further perpetuation of these dynamics.
Currently, the $USD remains in Bullish formation (Bullish TRADE/TREND/TAIL) and U.S. dollar correlations to the SPX (+) and Oil, Gold & Commodities (-) remain strong across durations.
Now, we’re beginning to see confidence chase the dollar higher as consumer confidence measures begin a nascent break out of their 4 year slumber. This morning’s University of Michigan Consumer confidence reading accelerated to 83.7 in May from April’s final reading of 76.4, posting it’s highest reading since July 2010.
The acceleration in the Univ. of Michigan confidence reading agrees with recent breakout to new 5Y highs observed in the Bloomberg Consumer Comfort Index and the steady advance in the Conference Board’s measure of consumer confidence.
Longer-term, outside of the last four years in which confidence readings essentially flat-lined, consumer confidence has been highly correlated with accelerating economic activity. A sustained breakout in confidence alongside ongoing housing and labor market improvement represents a fertile factor cocktail capable of catalyzing positive economic reflexivity.
#StrongDollar = Strong America.
Enjoy the weekend,
Christian B. Drake