Vols down and dirty (pg 3)
The history of the FX market since 2005 can be divided into three distinct periods – ‘carry’, ‘de-coupling’
and ‘Lehman’. We now believe that we are entering a fourth phase where official forces are more
apparent in the market. Clearly not every central bank can have a weak currency at the same time.
However, with authorities intervening through different means, dirty floats for exchange rates may
become the order of the day. This is likely to mean a continued decline in FX market volatility.
Will economic recovery boost the dollar? (pg 10)
The view that the US economy will be quicker to recover from the current downturn than other major
economies, and that this will boost the dollar, has some appeal. However, in the current environment, this
relationship does not seem to hold and it seems more likely that a stronger US recovery which boosts the
equity markets would be associated with a weaker, rather than a stronger dollar.
A curveball for the USD (pg 15)
We have discussed how stronger US growth expectations do not necessarily mean the USD should
strengthen over time. In a related context we now examine whether changes in the US yield curve are
influencing the USD. The relationship between the curve and the USD is complicated enough, but with
the added complication of QE it makes its interpretation even less clear. In a world of massive
government debts and deficits, it is possible that a falling USD causes the foreign demand for Treasuries
to wane. This in turn could cause yields on the long end to rise and thereby steepen the curve.
USD TIC-king the wrong boxes (pg 20)
The TIC data give important clues to the US capital account, as they show what the world is interested in
and what the world is now rejecting in the way of US assets. As one may expect, the world has turned its
back on US agency debt and is concentrating on Treasury paper. The TIC data holds clues about the USD
and at the moment the signals are emitting in the red zone.