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19 Jun 2013
Flash: Structural rebalancing of global economy would affect USD – UBS
FXstreet.com (New York) - A simple sensitivity analysis for all daily returns in 2013 will reveal that the dollar is largely 'risk neutral' at present, but this masks the changes (nominal values and trend) seen throughout the year.
Moreover, a simple internet keyword search trends analysis will show a marked rise in interest in the word 'tapering' in Q2. Unsurprisingly, in Q1 the DXY stuck to its 'haven' status before an upward move in its equity beta in April, and it even turned positive in May. According to Research Analyst Geoffrey Yu at UBS, “The story was broadly similar in fixed income (which should be expected): Q1 saw the DXY and bond prices move in the same direction (i.e. higher dollar but lower yields); in Q2 this relationship totally flipped and for a brief moment, it seemed as if the dollar carry trade was back after a long absence.”
Similar to the DXY's equity beta though, June was a month where the 'new relationship' was suddenly at risk again. We see two reasons: Firstly, markets were pricing in Fed changes but unable to digest the consequences. The dollar fell as liquidity-driven risk appetite was threatened, but once positioning cleared it became harder to justify sustained dollar weakness amid global risk aversion. This segues into the second point, i.e. if the Fed's next policy step will be 'stimulus withdrawal', structural rebalancing in the global economy will intensify.
Moreover, a simple internet keyword search trends analysis will show a marked rise in interest in the word 'tapering' in Q2. Unsurprisingly, in Q1 the DXY stuck to its 'haven' status before an upward move in its equity beta in April, and it even turned positive in May. According to Research Analyst Geoffrey Yu at UBS, “The story was broadly similar in fixed income (which should be expected): Q1 saw the DXY and bond prices move in the same direction (i.e. higher dollar but lower yields); in Q2 this relationship totally flipped and for a brief moment, it seemed as if the dollar carry trade was back after a long absence.”
Similar to the DXY's equity beta though, June was a month where the 'new relationship' was suddenly at risk again. We see two reasons: Firstly, markets were pricing in Fed changes but unable to digest the consequences. The dollar fell as liquidity-driven risk appetite was threatened, but once positioning cleared it became harder to justify sustained dollar weakness amid global risk aversion. This segues into the second point, i.e. if the Fed's next policy step will be 'stimulus withdrawal', structural rebalancing in the global economy will intensify.