North American session sold into the dollar’s upticks and Asia followed suit, taking the greenback to new multi-year lows against the euro and sterling while pushing it below the JPY110 level for the first time since last September. US trade action has become latest element of the narrative the seeks to explain the dollar’s slide and the decoupling of the greenback from interest rates. The euro reached a high in European turnover above $1.2350 and sterling pushed through $1.4100. The dollar eased to almost JPY109.50. The Australian dollar, which narrowly avoided an outside down day yesterday was bid through last week’s high of $0.8040. Similarly, the US dollar slipped below last week’s low near CAD1.2370.
At Davos, US Treasury Secretary Mnuchin provided the incentives in the European morning to continue to push the greenback lower. He expressed no concern for the recent slide and noted that a weaker dollar is “good for us as it relates to trade and opportunities.”
The price action brings new option strikes into view. There is a little more than $500 mln on a JPY109.20 strike that will be cut in NY today and another $400 mln near JPY110.80. Tomorrow, there is roughly $2.4 bln of options struck at JPY110.00-JPY110.05 that expire. Today, there is also an option struck at $1.23 for 640 mln euros and 1 bln euros of options struck between $1.2250 and $1.2275 that expire.
There are two broad explanatory models of currency movement that seem to be prevalent among investors. The first focuses on the relative price of capital (interest rate differentials) and the trajectory of monetary policy. The second focuses on external imbalances (trade and current account). The seeming decoupling of the US dollar from the movement of interest rates has seen greater emphasis placed on the latter. The tariffs the US has imposed on solar panels and washing machines draws attention to the deterioration of the US trade balance.
We too have noted that despite the striking improvement of the US energy trade balance, there has been notable deterioration of the non-oil balance. Yet, it seemed that the capital flows were sufficient to offset it, and the broader current account deficit, as a percentage of GDP has been fairly steady over the last few years near 2.4% of GDP, which is less than half the size of the pre-crisis levels.
