In my last column (bit.ly/3SsorFk), I had asserted, “However, my guess is that we are NOT going to see EURUSD at 0.95 or DXY at 115. [Of course, now that I have baldly asserted that, look out!]
And sure enough, no doubt just to prove me wrong, the dollar shot higher almost touching those levels in a week. It didn’t quite get there, though, and over the past couple of days has retreated quite a bit—in fact, the scale of the downward move in the DXY over the past few days hasn’t been seen since [no surprise] the crisis days of 2008.
So, we can safely say that the market is extremely edgy [again, no prizes], but the real question is whether these moves are also saying that the dollar has risen far enough. I guess subsequent days and weeks will tell the tale, but, being long in the tooth, I wanted to put yet another market behaviour pattern on the table, one that people often lose sight of
And it is this: markets make it a point of keeping analysts off balance by being inconsistent; just because, for instance, the dollar has risen each time that US interest rates have gone up or are expected to go up, it is no guarantee that the next upward move in US interest rates will bear the same result. This has been borne out multiple times over the past decades. Unfortunately, the last couple of decades where central banks spoon-fed investors with their plans have made it more difficult for investors/analyst to recall this reality—that markets are, in fact, independent of central banks.
Thus, it is possible that even if US rates continue to climb—say, towards and, perhaps, beyond 4.5% or 5%—it is no guarantee that the dollar will continue to climb in parallel. It will be volatile, to be sure—DXY volatility has already shot up above 9%, and it would appear that volatility will certainly go higher. But, I want to put on the table the possibility that, for the time being at least, we may have seen the dollar peak.
This would, of course, be a huge relief for central banks everywhere. Already, the UK has been pushed back into its Covid-corner of buying bonds, with markets viciously clobbering sterling and UK gilts. While the raging dollar was a prime mover of this, it was exacerbated by the clown-like politics that continues to unfold there. And while there is no prima facie reason why the market should not continue to push the UK when it is down—the market has no morals—there are other [off-market] signals that, perhaps, things will quieten down.
Jokes about Federer and Nadal crying because their prize money was being redenominated in sterling and memes of USD-EUR-GBP parity on a children’s merry-go-round are doing the rounds, pointing out that market movements have stormed into the public consciousness.
Also read: The cost of the Fed’s challenged credibility
This is often a precursor to a change of scene—rather like Joe Kennedy (reportedly) making his fortune by selling stock when his shoeshine boy started offering him buy advice.
Of course, I’m not definitively asserting that the dollar’s bull run is over—merely pointing out that it could be. And wouldn’t we all breathe a sigh of relief over that.
Kudos to RBI who has valiantly defended the rupee since even before May despite the unremitting pressure of rising US rates and the fallout of the war in Ukraine. To be sure, its efforts were supported by the fact that, even in the face of a world falling apart, India is still seen as a reasonable bet—in the dog days of July and August, when the rupee was fighting off the ignominy of sub-80, portfolio flows turned mildly to reasonably positive; even in September, flows have been only very slightly negative.
Additionally, as the RBI Governor pointed out, we have enjoyed other inflows which resulted in a positive BOP position in the first quarter of this year. And, of course, the interest rate hike on Friday has added further support to the rupee.
Nonetheless, the USD-INR market, having tasted blood, wants more. The NDF market is still some 35 paise lower than closing spot, so we can assume the pressure on the rupee will continue.
The global financial environment remains difficult. While last Friday’s humongous rally on Dalal Street was heartening, Wall Street remains mired in a real funk—the correlation of the Dow today to the Dow in 2008 is up to 75%.
The real hope is that, sooner rather than later, the market comes to believe the Fed—that it will do what it takes to control inflation. The economy will, of course, weaken, and the Dow will remain soft—perhaps, edging still lower. The dollar, however, will stop its relentless climb.
Perhaps, we are seeing the beginning of this.
The writer is CEO, Mecklai Financial