Black Swan Currency Currents
“Be ready to change your strategy with the environment. (The environment, not your strategy, is the data).”
Commentary & Analysis
Watching the currency market over the past couple of days has been akin to watching paint dry. In my case the paint drying analogy is probably because I have a few different scenarios in my mind and find all of them plausible (see, Orwell’s Doublethink lives in the minds of traders). My continuous question as I watch currency price action: Mr. Market, what are you telling us about the dollar?
Three simple scenarios now rattling in my head:
1. The correction is over the dollar is heading for fresh new lows as measured by the US dollar index. This is not my favorite scenario now, primarily because the dollar is getting yield support.
US dollar’s relative yield has risen as US rates across the curve have risen. Over the intermediate-term rising relative yield has correlated well with either dollar support, or a rally.
Below is a chart showing the 2- and 10-year yield spreads Eurozone-US, United Kingdom-US, Australia-US, and Canada-US. Relative yield has been moving in favor of the US against the pack: