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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