Currencies | Mar 14 2013
– USD bucking risk correlation
– US economy switching to longer term drivers
– USD strength may not last
– ANZ says buy risk on deep dips and sell dollar into strength.
By Andrew Nelson
Things aren’t quite right with the US dollar. Normally the greenback weakens when we see increasing risk appetite and strengthens on market corrections. Analysts from ANZ Bank still think it may be too early call the recent strength a permanent change given the US recovery is yet to see job growth that would induce the Fed to alter current policy.
It’s true that over the past few months, markets have started to take their first tentative steps away from what has become the normal, crisis mode trading pattern that has been in place since 2006. This is helping to usher in a slightly more sustained period of growth and in turn, increasing risk appetite.
In a more normal world, elevated risk appetite has been directly associated with a weaker US dollar index (DXY), but over the past few weeks, it’s been the other way around, with the DXY rising in line with increasing risk appetite. Were this trend to continue, ANZ thinks it would signal significant change in market psychology, with a transition to the strong growth-based US dollar we saw from 1994 to 2000.
ANZ believes this recent, stubborn strength is due to a steady flow of admittedly early signs that the US economy is starting to transition back to more normal longer term growth drivers, with continued good news on residential construction and employment providing much of the fodder.
It is still early days though, and the bank thinks it is far too soon to claim that markets have shifted from their 2006-12 crisis mode trading psychology. It’s hiding right there behind the curtain. What the bank does think is we’re seeing a bit of elevated risk appetite to account for currently building economic momentum, with net inflows to “safer” treasury bonds to hedge for cycle risk.
The problem is, the bank expects this current run of economic momentum and thus risk appetite will falter and then correct. That said, ANZ also sees the risk appetite side of the equation providing some support after the current flare-up dies down, given it seems the US is shifting towards longer term growth drivers. The bank also doesn’t see risk coming off like it did in 2009, 2010 and 2011 given inventory levels are neutral, the abovementioned shift to longer term growth drivers, and very accommodative monetary policy.
ANZ thinks the currently firming US dollar is anticipating too larger correction in risk appetite. It’s clear the bank expects some sort of a correction in risk appetite that will have some lingering support, it feels the depth and duration of the correction will be shallow. The bank expects a short shallow base will form given current neutral global inventory levels, the expectation of ongoing policy support and possibly stronger US hiring.
Thus, the bank says buy risk on deep dips and sell the US dollar and safe haven bonds into strength.
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