Insights   |   February 20, 2020

The US Dollar – Testing the Top of the Range – Moment of Truth for Risk On?

Caroline Grandoit
Global Head of Total Portfolio Solutions
Robert Petty
Executive Director and Chief Executive Officer, Fiera Asia
Caroline Grandoit
Global Head of Total Portfolio Solutions
Robert Petty
Executive Director and Chief Executive Officer, Fiera Asia
Judy Wesalo Temel
Senior Vice President, Director of Credit Research
Judy Wesalo Temel
Senior Vice President, Director of Credit Research
Candice Bangsund
Vice President and Portfolio Manager, Global Asset Allocation and Private Markets Solutions
Dominic Bokor-Ingram
Senior Portfolio Manager
Candice Bangsund
Vice President and Portfolio Manager, Global Asset Allocation and Private Markets Solutions
Dominic Bokor-Ingram
Senior Portfolio Manager
Judy Wesalo Temel
Senior Vice President, Director of Credit Research
Dominic Bokor-Ingram
Senior Portfolio Manager
Judy Wesalo Temel
Senior Vice President, Director of Credit Research
Judy Wesalo Temel
Senior Vice President, Director of Credit Research
Kenneth M. Potts
Senior Vice President, Portfolio Manager
Dexter J. Torres
Senior Vice President, Portfolio Manager, Head of Trading
Brian P. Meaney
Senior Vice President, Taxable Bond Strategist
Candice Bangsund
Vice President and Portfolio Manager, Global Asset Allocation and Private Markets Solutions

​​​The US Dollar Index (DXY) is probing the top of the trading range we have discussed in recent weeks and is attempting to break out. It’s too early to determine if the dollar is about to initiate a new leg up in this bull cycle for the dollar, but the moment of truth has arrived as we can see in Figure 1. Will a dollar break-out occur, and will it lead to a risk off correction? This comes at an awkward moment for financial markets and the Fed.

Today, The Wall Street Journal announced that the first weeks of 2020 was the biggest issuance period for foreign currency debt by Emerging Markets companies for the start of a year. Issuance in foreign currencies was $66.4 billion, which is almost double the $34.2 billion issued last year. This is a record level of debt issuance for the first weeks of the year and the fall in global rates was a key catalyst for the surge. 91% of this debt issuance was in US Dollars. This highlights the growing risk to Emerging Market nations for a dollar surge. Certainly, a dollar rally does not lead to an EM crisis – the dollar has been going up for years. Yet, traders (particularly in FX and risk markets) often respond to quick unexpected adjustments in the dollar by trimming risk – let’s see if it happens this time as well should a dollar break-out occur. If the dollar breaks out, and there is no risk-off correction – that will be a powerful signal that risk-on investors are highly confident about their positive outlook for earnings and growth.

Especially interesting, is the short-term price action in the dollar shown in Figure 2. The dollar has been going up in recent days, and that rally accelerated with the start of the Democratic Debate in Nevada and accelerated during European hours of trading. Investors and FX traders in Asia and Europe seemed to take the dollar higher in response to the debate and as it has hit the top of the trading range, FX traders in NY morning hours appear to have capped the dollar’s rally. Is the dollar becoming a bet on the Presidential election?

As for the Fed? If the Fed wants inflation over 2%, it cannot afford a stronger dollar. Watch for jawboning from the Fed to talk this currency down.

Figure 1: US Dollar (February 20, 2020)

Bloomberg, data accessed 2/20/20

Figure 2: US Dollar (February 20, 2018 – February 20, 2020)

Bloomberg, data accessed 2/20/20

 

 

Disclosures

Past performance is not a guarantee of future results. Inherent in any investment is the potential for loss.

This document is not intended as investment advice or a recommendation of any security or investment strategy for a specific recipient. Investments or strategies described herein are provided as general market commentary, and there may be no account or fund managed by Fiera Capital Inc. for which investments or strategies described herein are suitable due to the various types of accounts or funds that are managed by Fiera Capital Inc. Nothing herein constitutes an offer to sell, or a solicitation of an offer to purchase, any securities, nor does it constitute an endorsement with respect to any investment area or vehicle. This material cannot not to be reproduced or redistributed without the prior written consent of Fiera Capital Inc.

Certain information contained in this document may constitute “forward-looking statements,” which can be identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,” anticipate,” “project,” “estimate,” “intend” “continue,” or “believe” or the negatives thereof or other variations thereon or comparable terminology. Due to various risks and uncertainties, actual events or results or the actual performance of any strategy or market sector may differ materially from those reflected or contemplated in such forward-looking statements.

Statements regarding current conditions, trends or expectations in connection with the financial markets or the global economy are based on subjective viewpoints and may be incorrect.

The information provided is proprietary to Fiera Capital Inc. and it reflects Fiera Capital Inc.’s views as of the date of this document. Such views are subject to change at any point without notice. Some of the information provided herein is from third party sources and/or compiled internally based on internal and/or external sources and are believed to be reliable at the time of production but such information is not guaranteed for accuracy or completeness and was not independently verified. Fiera Capital Inc. is not responsible for any errors arising in connection with the preparation of the data provided herein. No representation, warranty, or undertaking, express or implied, is given as to the accuracy or completeness of such information by Fiera Capital Inc. or any other person; no reliance may be placed for any purpose on such information; and no liability is accepted by any person for the accuracy and completeness of any such information.

Any charts, graphs, and descriptions of investment and market history and performance contained herein are not a representation that such history or performance will continue in the future or that any investment scenario or performance will even be similar to such chart, graph or description. Any charts and graphs contained herein are provided as illustrations only and are not intended to be used to assist the recipient in determining which securities to buy or sell, or when to buy or sell securities. Any investment described herein is an example only and is not a representation that the same or even similar investment scenario will arise in the future, or that investments made will be as profitable as such examples or will not result in a loss to any such investment vehicles. All returns are purely historical and are no indication of future performance.