I spotted this little snippet. Its from a couple of days ago but its a bigger pic view.
Its a client note from Commerzbank, and its filed under EUR/USD but isn't really about the euro
- We do not see general EUR weakness.
So much for that, Commerz on the USD side of the equation:
hardly any new findings have been made that would justify the hope of higher yields for USD positions
the Fed's key rate (and thus USD deposit rates) is only one of the motives for holding the greenback … investments in the US - regardless of whether in portfolio or direct investments - have become more attractive
- spectacular performance of the US stock markets
- US tax reform
creates USD demand regardless of the deposit rate for short maturities
A sceptic may argue that this tax policy is not sustainable and instead creates an absurd (as cyclically superfluous) increase in government debt and medium to long term weakens the US economy overall and therefore constitutes a USD negative rather than positive argument. I am the first to agree with that, but it is too early to expect the FX market to be pricing that in.
That would mean that speculative FX traders would have to take the opposite position to all those investors who are now buying US stocks, factories etc. The FX market cannot provide that. It is quite good in creating liquidity, but cannot act as a judge on global investment decisions.
As a result the story of the USD negative twin deficit (the budget and current account deficit) is plausible medium to long term but does not currently constitute a USD negative but a USD positive argument.
This view is supported by empirics:
- periods of high twin deficits led to USD weakness at some stage but initially twin deficits were typically USD positive.
- That means further USD strength is quite possible. Anybody who is in on it just has to be aware of the fact that they are dancing on a volcano.
(bolding mine and comments very welcome!)
