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Few reasons why the USD may perform better than consensus, even if this is an inflexion point in the global IP cycle:
1/The usd is not beginning this cycle as a neg carry ccy. Unlike trough in prior IP cycles, the usd now carries positively against virtually every g-10 ccy.
This is unlikely to change given Fed has ruled out neg rates and other CB’s have pledged low rates for the foreseeable
This is unlikely to change given Fed has ruled out neg rates and other CB’s have pledged low rates for the foreseeable
2/ Similar story in EM, with EM carry offering minimal buffer to justify taking fx risk.
In latam for instance, outside of Mexico, the carry profile has tightened materially for all latam ccys in recent years.
In latam for instance, outside of Mexico, the carry profile has tightened materially for all latam ccys in recent years.
3/ In 2009 you could earn 10% being short USDBRL via 1y forwards. Right now you earn closer to 1.5%.
Easier to overlook a political mess when you are earning 10%, much less so at 1.5%.
Easier to overlook a political mess when you are earning 10%, much less so at 1.5%.
4/ USD denominated debt issued by foreigners has doubled as a % of global GDP since 2009. According to the BIS, much of this resides in EM sovereigns and corporates, whose revenues are not in dollars.
This type of original sin risk skews the in the dollar to the upside, imo.
This type of original sin risk skews the in the dollar to the upside, imo.
5/ US households are by far the healthiest in DM at the start of this cycle. 2009 sparked a major deleveraging phase.
They have room to spend, more so than anywhere else, I’d argue. US more likely to lead than lag the recovery this time around.
They have room to spend, more so than anywhere else, I’d argue. US more likely to lead than lag the recovery this time around.
6/ This doesn’t mean usd can't go down. Improvement in RoW growth expectations will likely see the usd depreciate.
This thread is more to call out the common 2009 analogue for a major dollar depreciation. Macro setup much different this time around. Risks to USD on upside imo.
This thread is more to call out the common 2009 analogue for a major dollar depreciation. Macro setup much different this time around. Risks to USD on upside imo.
