As discussed in last week’s Implications of a weaker USD, we started to observe USD early warning signals since Dec 3 2015 and again in March. Most importantly, the correlation matrix of USD Index ($UUP) against major assets has turned broadly negative, suggesting that global markets would benefit from a gradually weakening USD. Pimco’s head of European FX Thomas Kressin agrees: “The dollar’s three-year advance is coming to an end as central banks recognize a strong U.S. currency is not in the interests of the global economy” (8 April, Bloomberg.com). He further noted that The Fed “is willing to let inflation overshoot the 2 percent target,” not wanting to fall into Japan’s deflationary negative rate spiral. Indeed we alerted that US TIPS were the biggest positive surprise in our analysis of the March 16 Fed Rake Hike Delay decision, suggesting that increased inflation risk is starting to be priced into US markets.
Last week’s cross asset FNA Correlations confirmed a continued weakening USD trend with correlated global rebound. Fig. 1 below shows a series of new 100 day USD Index lows with declining volatility (left) and negative correlation (red links) to all major asset classes which broadly rebounded (green = positive return).
Fig. 1. 8 April Cross Asset FNA Correlations: USD Index negative correlation vs global assets
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