Research Summary
The report provides an in-depth analysis of the US dollar from various perspectives, predicting a massive expansionary regime. It discusses the US trade-weighted dollar index, long-term compression regimes, George Soros’s currency market analysis, and the impact of speculative flows. The report also examines US vs EU relative GDP forecasts, US market valuations, and the euro’s influence on the DXY basket.
Key Takeaways
US Dollar’s Potential Expansionary Regime
- US Trade-Weighted Dollar Index: Despite exaggerated reports of its demise as a reserve currency, the US trade-weighted dollar index continues to rise in a larger 17-year uptrend, currently in a 2-year sideways compression regime.
- Compression Regimes: Major long-term compression regimes are developing in various markets, including oil, AUD, CAD, EUR, CNH. These regimes are directionally agnostic, indicating a significant trend is imminent.
Analysis of Currency Market
- George Soros’s Currency Market Analysis: Soros’s currency equation, which considers factors like nominal exchange rate, nominal interest rate, domestic versus foreign price level, level of economic activity, nonspeculative capital flow, and trade balance, is used to analyze the currency market.
- Speculative Flows: Speculative flows seek out the highest risk-adjusted total returns, causing DM FX pairs to track relative market returns over time.
US vs EU Relative GDP Forecasts
- Relative GDP Forecasts: The report highlights US vs EU relative GDP forecasts over the past few years. The current relative GDP forecast would favor a breakout to the upside in the dollar soon.
US Market Valuations
- US Market Valuations: One significant headwind for the dollar is the high valuation of the US market. The relative PE ratio of US equities versus the rest of the world is 1.6std above their 30-year average.
Euro’s Influence on DXY Basket
- Euro’s Influence: The euro, which comprises roughly 60% of the DXY basket, has a significant impact. Yield momentum is starting to turn up in the euro’s favor while nominal spreads remain quite negative.
Actionable Insights
- Monitor the US Dollar: Given the potential for a massive expansionary regime, it would be prudent to closely monitor the US dollar and its influencing factors.
- Consider Compression Regimes: With major long-term compression regimes developing in various markets, these could present significant trends and should be taken into account in market analysis.
- Assess Impact of Speculative Flows: The impact of speculative flows on DM FX pairs and relative market returns should be evaluated for potential market movements.
- Examine US vs EU GDP Forecasts: The relative GDP forecasts between the US and EU could provide insights into potential movements in the dollar.
- Consider US Market Valuations: The high valuation of the US market could present a headwind for the dollar, and this should be factored into any analysis.
