Implications of a weaker USD

The USD Index reached a new 100 day low on Friday, after experiencing a cluster of three negative outliers in March (triple the expected 1 outlier in 20 trading day). Furthermore, an analysis of cross asset correlations shows that USD is now negatively correlated (red  links) against every asset class except Japanese equities.

Fig. 1. FNA Correlations: USD is negatively correlated to most global assetsUntitled

The broad negative correlation implies that a weaker USD would benefits most global assets. Fig. 2 shows systemic implications of a -3σ USD stress test, highlighting assets which would benefit most from a weaker USD.

Fig. 2. FNA Correlations -3σ USD stress test 

Untitled 4

Conversely, a stronger USD would be net negative to global risk assets, which implies that USD remains the most reliable global safe haven currency.

Given the broad systemic benefit of a weaker USD, however, it would make sense for central banks to support this trend globally. In particular, a weaker USD is supportive of commodity prices and takes pressure off Emerging Markets.

Here’s a short video focusing on USD correlation dynamics using FNA Correlations.

Video 1. Implications of a weaker USD (2.39 min)


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