Bull Sheet - Great Desire To Return To The Usual Pattern

The recent move in US bond yields provided an excuse for a dollar recovery, which was strongly positioned for the depreciation - I pointed out this in recent comments.

But is it enough for a trend change?

This question will remain open for a few more weeks; reversal process does not take place in three days, given that the depreciation of the US currency has been dragging on for a long time.

One of the arguments of supporters of the dollar rebound thesis is the potential discussion on the so-called tapering, i.e. limiting the scale of asset purchases by the FED. Recent increases in bond yields reflecting fears that massive monetary stimulation/policy, and now fiscal stimulus by Joe Biden's team, will lead to faster return of inflation, has led some to perceive the risk of considering a QE shortening already in the second half of this year. For the experts of the Morgan Stanley bank, it was one of the key arguments for moving away from the thesis of further weakness of the dollar. Goldman Sachs still remains in the opposite camp, not expecting a tapering before 2022.

DXY Weekly Chart

Who's right?

In the fall of last year the FED has announced that it will tolerate periodic overshooting of inflation, which may beat the GS experts' scenario. Nevertheless, pushing for a clear weakness of the dollar in the coming months may be too obvious. Considering that the US Dollar Index has come close in recent weeks to the lows from three years ago (lows from Q1 2018), the prospect of more and more frequent upward corrections and thus increased volatility on dollar pairs becomes more likely.

Dominik Stone

Tokenhouse Yard

City Of London, EC2R 7AS

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