As we search for trade ideas to add to our FX portfolio it is difficult not to be drawn to the US Dollar and its role it could potentially play in reviving the volatility in the markets.
The past few years have seen the U.S dollar emerge as a reliable funding currency for investors seeking higher yielding assets in a strategy commonly known as the carry trade. As the Fed embarked on years of easy monetary policy made up of ultra-low interest rates and quantitative easing, the dollar suffered as a result.
However, as the U.S economy continues to improve and the Federal Reserve taper each month the dollar becomes less and less attractive as a source of global funding.
Data suggests the U.S economy is on the path to recovery with another encouraging Non-Farm Payroll number last week, and the Unemployment Rate falling to 6.1%. Furthermore, the housing data has been supportive of health domestic demand. The disappointing first quarter GDP number can be put down to extreme weather conditions.
Furthermore, the Fed’s preferred gauge if inflation (PCE) is on the up. A few more months of price increases means Janet Yellen will not be able to write off the data as just ‘noise’.
With the improvements in the U.S economy we should see U.S rates start climbing, which will dampen risk appetite as investors readjust their funding source of their portfolios. Say hello to higher volatility!
For the reasons outlined above I have a adopted a fundamentally bullish bias for the U.S dollar, especially against the Norweigan Krone and Euro. Additionally, strategic short CHF/JPY order is a defensive short should volatility kick-off in a big way.
As always this is just my views on the market. This is not investment advice.