Our view on the USD for 2019 was that it would face modest downwards pressure. The pressure has been modest, but it has been to the upside. Nonetheless, overall the dollar (DXY) has been in a tight range this year (~4.5%). Every attempt to the upside has been met by an increasingly more emphatic rejection, with the net result the DXY is up only ~1.2% in 2019. And now, the headwinds we had expected for the dollar are increasingly coming into play, and we think that the modest upwards USD trend will be replaced by a modest downwards trend, which should at the margin support risk assets.

The potential turn in term premium at the end of August is significant. It has allowed yields and the yield curve to begin to move higher. As the top-left chart shows, this is consistent with a weaker USD. Also, the Fed’s cutting cycle has allowed other central banks to cut, but many of them are projected to cut less than the Fed over the next 6 months, which should also keep pressure on the dollar (top-right chart). We can also see in the bottom-left chart that foreigners are buying fewer US assets – due to egregious hedging costs and a hitherto flat/inverted yield curve – which the chart shows tends to be associated with dollar weakening. Lastly, speculators are quite long USD (vs DM FX) and the DXY, opening up the risk of a capitulation and further falls in the dollar.

(Click on image to enlarge)Source: Bloomberg, Macrobond, Variant Perception