The US good trade balance data today was a bit better than expected but the US is still running enormous trade and current account deficits, something that Jeff Gundlach has been warning will eventually undercut the dollar.
Bank of America global research today discusses the relation between dual deficits and FX prices and answers the question about whether twin deficits matter.
"The answer is not for now...Much of the focus through the post-pandemic period has been on the cyclical policy response to combatting higher inflation, and while USD has been the standout beneficiary from a combination of higher rates, G10 FX is becoming increasingly misaligned from its longer term structural anchors. The cyclical forces that have provided USD with strong tailwinds are set to continue in the near term, but the contours of our longer term projections assume that currencies will gravitate back towards fair value," BofA notes.
"Over the medium term, structural factors such as balance of payments (BoP) and budget balances matter for FX valuation and are key inputs for the longer term investment community. The pandemic has exacerbated some of these structural imbalances, which we believe will become more important through the course of the coming year as the rate-tightening cycle reaches maturity," BofA adds.
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