Why the Heck Is the U.S. Dollar Up So Much Today?

Takeaway: We think #deflation is the root cause of U.S. dollar appreciation.

At 8:25am EST, the DXY was trading at 94.492. It’s since shot up in a straight line in conjunction with the release of fairly dovish inflation data. Insert Viagra joke HERE:

 

Why the Heck Is the U.S. Dollar Up So Much Today? - 2 26 2015 11 05 40 AM

Source: Bloomberg L.P.

 

Why the Heck Is the U.S. Dollar Up So Much Today? - CPI

 

So why the heck is the dollar up so much today? One possible explanation Keith and I are discussing on the desk is the stabilization in Core CPI in JAN. Perhaps this is a harbinger of prospective stabilization in Core PCE Inflation, which will be released Monday morning at 8:30am EST.

 

Why the Heck Is the U.S. Dollar Up So Much Today? - CORE CPI

 

Why the Heck Is the U.S. Dollar Up So Much Today? - CORE PCE

 

If stabilization in the Fed’s preferred inflation metric turns out to be the case, that would allow the Fed to look through the persistent weakness in Headline CPI, which should bottom in/around JUN (assuming no material incremental weakness in commodity prices). I believe the word you’re looking for is “transitory”...

 

Why the Heck Is the U.S. Dollar Up So Much Today? - HRM Commodity Price Sample YoY vs. CPI YoY

 

Why the Heck Is the U.S. Dollar Up So Much Today? - CRB YoY vs. CPI YoY

 

But is that an accurate assessment of what is actually occurring? Looking at Fed Funds futures curve, rates have only moved up +2bps and +3bps on the JUL ’15 and DEC ’15 maturities, respectively, on the day. That would seem to support another explanation Keith and I just discussed: today’s melt-up in the DXY isn’t all about a hawkish Fed.

 

Why the Heck Is the U.S. Dollar Up So Much Today? - FFF JUL  15

 

Why the Heck Is the U.S. Dollar Up So Much Today? - FFF DEC  15

 

So then, what is driving today’s bout of material USD strength?

 

We think it’s about #deflation. And the realization that real interest rates in the U.S. should continue to move higher, not lower, over the intermediate term. What you’re seeing today is not necessarily unlike what occurred in Japan for much of the past 30 years as the currency strengthened amid persistent deflation despite various Policies To Inflate.

 

Why the Heck Is the U.S. Dollar Up So Much Today? - 9

Source: Bloomberg L.P.

 

We reiterate our intermediate-to-long term bullish bias on the U.S. Dollar, having been there since last August. Please don’t short the EUR down here, though. The former is pinned at its immediate-term TRADE line of support at 1.12. The USD/JPY cross has a full big figure to go to its immediate-term TRADE line of resistance at 120.33.

 

DD

 

Darius Dale

Associate: Macro Team


SECTOR SPOTLIGHT | Live Q&A with Healthcare Analyst Tom Tobin Today at 2:30PM ET

Join us for this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more

6 Charts: The French Election, Nasdaq All-Time Highs & An Earnings Scorecard

We've been telling investors for some time that global growth is picking up, get long stocks.

read more

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more