米ドル： 第4四半期はさらに上昇か？ - US Dollar: More gains in Q4?

Summary:  US dollar strength is the talk of the town, but investors are questioning how far USD gains could extend especially as the memory of Q4 2022 comes back to haunt. DXY index plunged by 8% in Q4 2022, but we see fundamental differences on why the USD strength of this year could have more room to run and prove more sticky as well.

The US dollar closed its 11^th straight week of gains last week, and the DXY index was up 2.5% in the month of September – it’s best month since May – and recorded gains of over 3% in the third quarter. These gains have been driven by a number of factors as listed below, and it appears that these factors could continue to have legs as we get into Q4.

1. The higher-for-longer narrative has been reverberating through the markets over the last few weeks, resulting in a run higher in long-end Treasury yields. This was underpinned by the Fed’s latest dot plot which continued to show an additional rate hike for 2023 and also pushed back on the rate cut pricing for next year.

    

2. The recent surge in oil prices has further complicated the macro outlook, as it boosts headline inflation expectations while weighing on consumer spending. This has meant that central banks continue to maintain flexibility to raise rates again if second-round and third-round effects of higher oil prices are seen in the months ahead.

    

3. Meanwhile, US exceptionalism story has remained intact despite risks to spending seen in Q4. Stagflation risks are rising for the Eurozone, with Germany remaining under pressures and rising fiscal deficit in Italy that has led to the 10-year BTP-Bund spread rising towards the 200bps-mark last week. Historically, this spread touching 200bps has sparked major concerns for the ECB, and clouds continue to gather over the outlook for EUR.

    

4. China property market risks made headlines again last week, and the improvement in September PMIs remained underwhelming. While official PMIs came in higher-than-expected, the undershoot in Caixin manufacturing and services PMIs for September highlighted the pressure on private sector and exporters suggesting that a significant cyclical upturn remains tough to envisage.

    

5. Risk assets have started to come under pressure as the outlook for the US economy has started to worsen, and a deteriorating equity outlook spooks demand for the US dollar as a hedge.

    

6. Carry trades remains prominent with FX volatility remaining low, driving further demand for the USD.

Some market participants have started to get cautious and started to question if the fourth quarter could bring a reversal in the USD like 2022. Despite a US government shutdown having been averted for now, there are risks piling up for the US economy in Q4. Long positioning in the USD is also getting extended. However, we would argue that there some key differences in the dollar gains of early 2022 to what we have seen so far in early 2023.

1. The gains in the USD in 2022 were mostly underpinned by risk aversion following the Ukraine invasion. This characterizes the left-hand side of the dollar smile, which is usually less sticky. In contrast, this year’s gains have been underpinned by fundamental outperformance of the US economy which is likely to have more legs.

    

2. This year’s gains in the dollar have remained far more orderly, with DXY index up only 2.6% year-to-date, as against 17% gains from January to September 2022.

    

3. There were 150bps of rate hikes prices in for the Fed at end-September 2022, and a softer CPI print questioned those market expectations. However, as of today, markets are still pricing in about 75bps of rate cuts in 2024 as against the Fed’s dot plot showing 50bps. This could limit the scope of dovish re-pricing needed in the Fed expectations.

So, what could turn around this strength of the US dollar?

1. We need to continue to watch the US economic indicators, such as ISM surveys or the labor market data due this week. Any deterioration in the US economic momentum could start to weigh on the US exceptionalism story and limit the potential for long-end yields to run higher.

    

2. Gains in the USD have been especially worrisome for policymakers in Japan and China, that have economic and policy divergence to the US. This has prompted several rounds of intervention concerns, and a real intervention threat remains. While unilateral interventions are seldom useful, threat of a coordinated intervention also cannot be ruled out and that could bring the USD lower.