Macro Digest - US$ is about to go much higher....

John Hardy and I are working on small piece on how chronic deficit currencies is about to weaken, this coincides with cost-of-capital in the US breaking significant resistance levels.

 

US 2YR – important as this is key benchmark for short-term Fed policy…. We have risen >25 bps from low in this cycle…

 

 

 

The almighty benchmark…1.7500 old level..

 

 

The full circle… Deficit countries/currencies is highly US$ financed, cost of capital rises, currencies weaken…..

 

The ZAR, AUD, TRY and CAD have outperformed relative to both their economic but also their political climate – this has almost exclusively be driven by weaker US$ and a less aggressive Fed…. Now this seems to be reversing..

 

We are core long $-TRY, $-ZAR, and short CAD and AUD….This is performance including carry… (Chart shows you long US$ - hence outperformance by deficit currencies show charts falling….) 

 

Note how deficit currencies was "low" when Fed promised 4-5 hikes one year ago……

 

 

 

As seen since Fed stopped talking 4-5 hikes in early 2016 the deficit currencies outperformed and dramatically so…. Now we saw low in August and we are getting into "net gain as portfolio even including negative carry (when long US$)…

 

PPS: Don't forget US Money market reforms starts from this weekend…

 

 

Conclusion

 

You can ignore cost-of-capital rising in the US, but you can't run from it medium and long-term….

 

We see the above as two interlinked macro moves which should lead to further US$ strength from here.

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

 

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