The weakening of the USD continues to play out. The confirmation from Beijing that phase 1 of the trade deal will be signed this coming week coupled with rising expectations for an economic recovery in 2020 have started to see DXY breakdown.
The USD is a ‘counter’ cyclical currency. Thus, as capital flow to risks (i.e. E.M. Asia and the like), it flows from the US. This normally manifests into a steepening of the yield curve also a USD negative.
There are three points to watch in 2020 for the USD:
- The Fed has cut interest rates multiple times since June 2019 and is now expanding its balance sheet via repo operations and Treasury bill purchases. All of this has and is, cutting the interest rate premium it enjoyed over the rest of the world. It could even be suggested that this new balance sheet expansion programme will mark the peak of the USD.
- “uncertainty” diminishing – uncertainty is a great safety inflow influencer and a core driver of the USD. At the end of 2019, the global uncertainty began to diminish, and outflow have begun. This trend should show up in DXY declines in the first half of the year as outflows move to cyclical and attractively valued markets ex US.
- The final point is a flow on from points 1 and 2. As these events ramp up the stubbornly high net long speculative positions that have built up in USD over the past 3 years will unwind. It is a very crowded position and it is still 2 standard deviations above the long-term average.