9
Daniel P Hui
(1-212) 834-5997
daniel.hui@jpmorgan.com
Patrick R Locke
(1-212) 834-4254
patrick.r.locke@jpmchase.com
policy expectations, we have recently flagged that many
global risky assets, including high-yielding and growth
sensitive currencies, have already priced in a material
rebound in the global manufacturing cycle (Exhibit 2;
FXMW: The pricing of great expectations when reality
bites, 1 March). This adds to our assessment that a
material and sustained upgrade to the broad global
growth outlook is necessary for the US’s growth
deceleration and Fed's new dovish stance to translate
into a sustained broad-based dollar downtrend (Exh. 3).
The dollar’s vulnerabilities are mounting, but
remain chronic or contingent for now, rather than
acute. While above we have argued that the dollar has
remained strong and resilient for very good reasons of
near-term cyclical outcomes, this does not discount a
recognition that there are a number of mounting
vulnerabilities for the dollar which have been less
expressed to-date, either because they are chronic and
structural in nature rather than acute, or are
contingent. One contingent vulnerability is the
forthcoming review of the Fed framework; although we
believe preliminary discussions around the desire to
raise medium-term inflation expectations is already
resulting in more dovish Fed rhetoric (see FOMC
preview, and change in our Fed view, 14 March), the
bigger impact on the dollar may come only if and when
inflation expectations actually materially shift (Exhibit
4; FXMW Who let the doves out?, 22 Feb). And this is
something that may only come later in the process when
the conclusions of the Fed framework rethink are more
formally articulated. These layer on top of the more
perennial chronic structural drags on the dollar which
have long been identified, including the notably
widening twin deficits (see The messy story of twin
deficits and the dollar, Feb 2018) and the potential loss
of hegemonic reserve currency status (see The USD’s
reserve currency status, Oct 2018).
Washington policies and politics remain another
contingent vulnerability. For now, a US-China trade
deal is not likely to be finalized until at least April, auto
tariffs remain a wildcard in trade negotiations with
Europe and Japan, USMCA ratification faces a
distinctly steep uphill battle in Congress, and Democrats
continue to offer little in the way of legislative
cooperation with the Trump administration. A
potentially imminent event in Washington’s near future,
however, is the release of the highly anticipated Mueller
report, said to be nearing completion. We believe that
USD will see through much of the noise surrounding the
initial release, unless the Mueller findings allow for a
direct line towards impeachment, in which case the 1998
Clinton impeachment playbook for the dollar would
provide the closest approximate template, which would
point to dollar downside.
Exhibit 3: In 2016, markets waited patiently after the January risky
market trough for 4-5 months before the global PMI started picking
up and delivering on earlier expectations
LHS: MSCI World & JPM Commodity index, 1-Mar-18=100; RHS: Global Mfg PMI
Source: JPMorgan
Exhibit 4: A simple real-rate spread model suggests a 50bp rise in
inflation expectations could weaken the dollar by 6%
USD Index = 97.03 + 11.46 * (Real yield spread between US and equally
weighted basket of EU, UK, JP), RSQ = 75%
Source: JPMorgan; Note: Real Yield of 10y government bond yields less 5y5y inflation breakevens
Table 2: Alternative scenarios to base-case view
Bearish: (1) Global growth rebounds vigorously (2) Trade conflict is eliminated (3) Washington
issues worsen including disruption from the Mueller investigation or Debt Ceiling
Bullish: (1) US cyclical exceptionalism extends; (2) Global growth rebound fails to materialize;
(3) Trade tensions worsen (4) Fed communication turns more hawkish
FOCM Mar 20; NFP Apr 5; Flash PMIs Mar
22, Core PCE Apr 1, CPI Apr 10
Fed speak, news on trade war, USMCA,
Mueller Investigation, debt ceiling
49.5
50
50.5
51
51.5
52
52.5
53
65
70
75
80
85
90
95
100
105
JPMCCI Aggregate Price Index
Global Manuf PMI
80
85
90
95
100
105
110
115
120
125
130
Mar-07 Mar-09 Mar-11 Mar-13 Mar-15 Mar-17
USD Index
Real Yield Spd Model