Market Drivers October 15, 2018
Risk off flows push USDJPY towards 111.50
Brexit talks stall
Nikkei -1.87% Dax -0.05%
Europe and Asia:
USD Retail Sales 8:30
Dollar took a beating in Asian and early European trade as risk-off flows sent the buck reeling with USDJPY trading to lows of 111.62 while euro, cable, and Aussie all set fresh session highs as outflows continued.
It seems counterintuitive that the greenback would be suffering such sharp selloff especially when its counter pairs face problems of their own, but there are several reasons why the action in the dollar may be different this time.
As our colleague Kathy Lien pointed out the vast profits built up in dollar-denominated assets (primarily stocks) are now coming under stress and foreign investors may simply be looking to lock in their gains, precipitating much of the outflows.
Secondly, the rising specter of twin deficits (trade and budget) – something that hasn’t dogged the dollar is years may be coming back in vogue. The Trump Administration’s massive bet that trillion dollar US deficits would result in supercharged growth could have misfired. We have long argued that Q2-Q3 may have been peak growth for the US as lack of meaningful wage growth and massive misallocation of capital into economically nonproductive activities such as stock buybacks could leave US growth short of expectations while facing a higher deficit and debt service costs. This could be known as the “Atlantic City trade” in honor of Mr, Trump’s woeful mismanagement of casino properties in 1990’s which also used a lot of debt with little growth to show for it. To that end, today’s US Retail Sales numbers will be key assuaging those fears with markets looking for a very healthy rebound of 0.6% vs. 0.1% the period prior. If the data fails to deliver it will only exacerbate fears that the US has passed peak growth.
Lastly, the sharp decline in financial assets and the concomitant falloff in investor sentiment could force a halt in Fed’s relentless rate hiking cycle. That, in turn, will help the high yielding antipodeans such as Aussie and kiwi, both of which are now trading on interest rate differentials rather than risk off flow and if US yields begin to flatten again the rebound in the two pairs should continue.
So, for now all of these factors continue to weigh on the greenback and explain why despite failing Brexit talks, persistent disagreements between EU and Italy and falling equity prices, the buck can’t find a bid.