The dollar's dominance persists, but for how long? Despite recent positive US data, the de-dollarization trend remains a distant dream. Here's the latest in the FX world:
US Dollar's Resilience:
- US rates and the dollar have ticked higher this week, thanks to improved US data. Powell's Fed criticism hasn't dented the dollar's strength.
- US Treasury data reveals foreigners' unwavering appetite for US portfolio assets, making the case against the dollar an uphill battle.
USD's Steady Climb:
- The dollar's rise is likely a macro move, supported by robust US data like retail sales and jobless claims.
- The Fed's Beige Book indicates a gently expanding economy, prompting investors to adjust their expectations for the Fed's terminal rate.
- DXY edges higher with minimal volatility, reflecting the market's cautious optimism.
Foreigners Still Love US Assets:
- US Treasury TIC data for November shows foreigners' continued investment in US asset markets, particularly equities.
- Private sector inflows dominate, with around 45% in equities. Even foreign officials bought a substantial amount of equities.
- While BRICS may be offloading Treasuries, private sector flows overshadow these actions.
De-dollarization: A Slow Process:
- De-dollarization is a gradual process, and a weaker dollar this year may depend on lower US rates and increased foreign hedging of US assets.
A Quiet Calendar, But Dollar's Strength Persists:
- Today's data calendar is relatively quiet, and the dollar's gentle bid remains unchallenged.
- Potential threats to the dollar include heavy intervention in USD/JPY and USD/KRW, with the US Treasury's support.
- DXY's upward trajectory towards 100 seems probable above 99.45/50.
EUR's Role in Carry Trades:
- EUR/USD volatility remains low, and the pair is expected to stay range-bound in the near term.
- Investors favor funding carry trades out of the euro due to lower costs compared to the dollar, despite the yen's potential risks.
- EUR/USD may drift towards 1.1555/65 without significant market excitement.
USD/JPY: A Volatile Story:
- Predicting USD/JPY is challenging due to upcoming political events, including Japan's snap election on February 8.
- A significant improvement in the LDP's fortunes could impact the yen, but surprises are always possible in Japanese politics.
- The potential for joint Fed-BoJ intervention to sell USD/JPY adds an intriguing twist, making USD/JPY a volatile story in the coming month.
PLN's Cutting Cycle:
- The National Bank of Poland's press conference confirmed the ongoing cutting cycle, despite unchanged rates on Wednesday.
- The governor left the February meeting open, suggesting a possible pause until April, keeping all options on the table.
- The terminal rate remains uncertain, but the market reacted dovishly, reversing Wednesday's hawkish sentiment.
- Expect a weaker PLN as liquidity returns, with the market testing 4.220 due to this week's NBP message.
Disclaimer:
This publication is for informational purposes only and does not constitute investment advice. Readers should conduct their own research and consult professionals before making any financial decisions.
What are your thoughts on the dollar's resilience and the potential for de-dollarization? Is the market underestimating the impact of foreign investment in US assets? Share your insights and let's spark a conversation!
