USD recovery continues - BBH

The US dollar recovery that began in North American yesterday continued to in Asia and Europe as the geopolitical anxiety sparked by North Korea's missile over Japan subsided, explains the research team at BBH.  

Key Quotes

“The US response was seen as measured and tempered.  North Korea indicated that the missile test was done to protest the annual military exercises of the US, South Korea and other allies in the region.  During the military exercises last year, North Korea also protested with a missile launch.”  

“Geopolitical tensions often seem to spur a short-lived but sharp reaction in the capital markets.  However, recall that the dollar was already selling off before the latest developments on the Korean peninsula.  The geopolitical developments accelerated the move, and then the profit-taking was triggered.  The Australian dollar was among the weakest of the major currencies yesterday, and today it is the only major not weakening against the dollar.”  

“The Dollar Index reached 91.62 yesterday, the lowest level since early 2015.  The 91.20 area corresponds to the 50% retracement of the big rally since the middle of 2014.  Our constructive strategic outlook for the dollar was fundamentally anchored by the divergence theme, which we think is still intact (balance sheet and policy rates have not reached peak divergence).  Our more tactical bearish stance on the dollar was, in part, based on the understanding that the dollar's down move this year is a correction to the rally since 2014.  A break of the 91.20 area would suggest the risk of a new leg down to the 6.18% retracement, which is found near 88.25.”  

“The long dollar position was crowded at the end of the year.  But now, formal surveys, some speculative positioning in the futures, anecdotal stories, and the way implied vol moves in the options market all point to the short dollar position as being overcrowded.  In terms of time, we have anticipated a better fourth quarter for the dollar, but we are concerned that the looming US debt ceiling and spending authorization deadlines can weigh on the dollar first.”