Die USD, die!

At last, the American dollar – hell, like the entire union – is in decline.

Here’s some Bible stuff to help you feel a little righteous about it:

Pride comes before the fall.

Or to be exact (and probably why the Bible doesn’t sell so well anymore):

Pride goeth before destruction, and a haughty spirit before a fall.

— Book of Proverbs, 16:18

Pride in this case, we could call the haughty US Dollar’s obscene 2022 rally.

USD index 1-year chart

With most of the world in various stages of self-immolation, currency analysts would’ve been having trouble washing the guilty stank of a bouyant USD from their Armani suits as the US dollar rose 12% against the basket of top currencies and 22% against the hapless Japanese yen in light of the Fed’s determination to bring inflation, which almost hit double digits earlier this year, back towards its target of 2%.

Coulda been a contender

If you had to cast the USD in a Martin Scorcese film about global currencies in 2022, De Niro would be a walk-in for the role. The raging USD bull has been off the hook all year with FX traders piling in to bet on rate hikes and inflation, pumping the greenback ever higher.

Now, just like Jake La Motta, they’re turning against it as one.

Former bulls including JPMorgan Asset Management and Morgan Stanley say the era of dollar strength is ending as cooling prices spur markets to trim bets on further Federal Reserve tightening. That may spell buying opportunities for the currencies of Europe, Japan and emerging markets.

Overnight, JP Morgan’s Kerry Craig told Bloomberg the day of the US dollar is waning.

“Markets now have a better grasp of the Fed’s trajectory. The dollar is no longer the straight, one-way buy we’ve seen this year. There’s room for currencies like the euro and yen to recover.”

And right on cue with the promised hawkish chatter, Fed policymakers were out in force again, throwing iced water on the forlorn wishes of any easing in the tightening cycle.

The Fed’s St Louis chief James “I am by far the least” Bullard won the ‘watch me’ stakes again overnight – suggesting markets have put too much weight on inflation coming down naturally and not enough on Fed policy becoming a lot more restrictive to get prices under control.

“There is still a heavy degree” of thinking inflation will go away naturally, Bullard told Barrons in an overnight webcast.

It’s still possible though that risk sentiment can improve more meaningfully this week as PCE inflation numbers and the November jobs report are due on Thursday and Friday, not to mention the ISM manufacturing PMI, which may keep alive hopes of a Fed pivot if they ‘disappoint’.

In currency markets, the US dollar was broadly retreating from Tuesday highs and briefly slipped below 138 yen.

There’s an alignment of currency-quaking events this week that look a lot like the kind of storm George Clooney might go fishing in, possibly with Marky Mark if they were both particularly hard up for some swordfish.

These are likely to shape the US dollar’s trajectory for the near-term, according to The FX Whisperer from Coogee, XM CEO Peter McGuire.

“The greenback’s strong period has not yet definitively come to an end but, chances are, it will within the next six months. That change in US Dollar direction will have a material impact on commodity prices,” McGuire says.

Pete says from amid this perfect storm of leading indicators will emerge a speech by Fed boss J Powell tonight (our time), followed by the latest employment report on Friday.

“The Fed chief could strike a hawkish tone, while most indications suggest the US labor market is still in good shape. As for the dollar, even though the rally has stalled lately, a trend reversal is probably a story for next year.”

USD loses its JDV (joie de vivre)

Like other commodity currencies and the rest of a pack brow-beaten by the USD, the little Aussie battler, peso of the Pacific, dollarydoo or dollarbuck (AUD) rebounded of sorts in the middle of the month equidistant with the broad-based US dollar weakness, inspired by solidifying expectations of easing US Fed (Federal Reserve) rate hikes to come.

The AUD/USD remains on track to snap three straight humiliating months of losses. In contrast to its erstwhile ally, it’s been a miserable run for the AUD, which has wallowed in the kind of lows more associated with Black Swans and rampant global economic crises – like the GFC (global financial crisis) of 2008 and when the pandemic blew in from a location nearby whose origin is of little consequence.

Having bottomed at a near two-decade low of 0.55 against the US dollar in March 2020, the Aussie dollar-buck collapsed in a quivering heap as COVID went global, shutting down commodity markets and supply lines, closing off our major export destination of China and sucking over 12% from the commodity sensitive local currency through Q1 20.

Not just schadenfreude

A cheaper US dollar is a big deal for more than just currency traders. The European economies have been whacked by imported inflation, and a lower USD will ease the cost of food for emerging economies and harder-hit countries. A falling USD will go a long way to reducing onerous debt repayment burdens for all those governments like ours who can borrow in the USD.

It’s just been a terrificly meek few months for the greenback. Positively Gallic in its retreat from record highs.

“The USD has surrendered almost half the gains it recorded this year, as some early signs that inflation has started to simmer down saw traders unwind bets that the Fed will push interest rates above 5% this cycle,” Pete says.

“Investors seem to be placing emphasis on several leading indicators suggesting the US economy is losing steam, betting that this will prevent the Fed from raising rates much further.”

For now the captain says keep those eyes on the horizon for the usual signs of darkening skies – glum business surveys, a softening housing market, low consumer morale, and a deeply inverted yield curve.

“All classic warnings of trouble ahead,” McGuire warns.

Also on investors’ agenda this week is OPEC’s monthly output decision – due around our time on Sunday. The less-haughty USD is doing its bit here too.

There’s some reports out there suggesting OPEC and a few non-OPEC buds are mulling a further cut in production output, especially now the demand picture in China is coloured by COVID-protests and the heightened global recession risks this brings.

Oil futures were last up about 2%, having almost hit 12-month lows on Tuesday.

It’d be nice to see a few cents knocked off the petrol station signs around my kids’ school in Sydney’s classy eastern suburbs. We don’t live there, we don’t get our petrol there, but in the 10 or so mins it takes me to offload Les Grommets, the cost of a litre goes from ‘standard rip-off’ to ‘now you’re taking the piss’.