Via eFX:
Stocks have tumbled, with much of the drop in recent days and he 2-year differential, which powered the Dollar higher has pulled back sharply, the biggest drop since the “no taper” surprise in September 2013. To get more insights on that, Goldman Sachs assess how vulnerable the USD is to the many cross-currents in the market.
“We decompose the 20bp drop in the 2-year differential since October 3 into:
(i) negative growth spill-overs from abroad;
(ii) more dovish Fed speak;
(iii) the impact of Ebola headlines; and
(iv) yesterday’s weak retail sales report,” GS clarifies.
GS’ findings:
First, we still believe in the strong US growth story and do not think activity will slow that much. This is Dollar bullish in the near term.
Second, a dovish shift by the Fed is the main risk, but given that the Fed – like us – remains optimistic on the US, we view this as unlikely.
Third, should the current ‘growth scare’ persist, it would be a deflationary shock that should hit the Euro area – where HICP inflation is already near zero – harder than the US. This would reinforce our Euro downside view, while the broader “risk-off” in such a setting would boost the Dollar and weigh on commodity currencies.
“Big picture, we therefore remain Dollar bulls,” GS concludes.
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