Either way, imagine the movement on the dollar if there was actually
some positive news out of the US. Most investors are not holding their
breath on this front, but Gavekal notes there have already been a fair
number of positive developments:
1. The market is shrugging off bad news on Fannie and Freddie.
On Wednesday, shares in Fannie dropped 20 per cent and Freddie shed 32
per cent as speculation increased on a possible government bailout.
Yet, despite this, US equities performed well - indeed S&P500
financials actually rallied 1.6 per cent and diversified banks rose by
a notable 3.7 per cent. This has psychological significance, in
Gavekal’s view: investors are now focusing on the positives and less
prone to panic.
2. US exports are on an upswing, expanding at rates not seen since
the 1980. While some argue the trend will peter out if the dollar
continues to rebound, the truth is more complicated. After all, says
Gavekal, we are living in the globalised new age, where companies can
call a bank and buy a hedge to protect themselves from fast-moving
forex trends. This means it takes quite a few years before a currency’s
trend is reflected in exports, and explains, for instance, why the
euro’s rally took a very long time before it began weighing on
Germany’s stellar exports. Moreover, the dollar has a long way to go
before it gets “expensive”.
3. It is a US election year — yet protectionism has not reared its
ugly head. It is hard to win a US election without vowing to protect US
jobs from overseas competition, and regularly bashing China. Yet
recently, protectionist rhetoric has been relatively light, especially
against China. Whether due to the Sichuan earthquake or the Olympics …
or surging US exports, it is a positive sign.
4. Sentiment is improving. Consumer confidence remains near historic
lows, but is improving. A number of polls issued this week - from
ABC/Washington Post to the Bloomberg/LA Times poll - show that
Americans are regaining some optimism about economic prospects. Falling
gas prices is obviously one catalyst - and you can expect oil to
continue to head south.
5. The US tax rebates have not been spent - and unlike a month ago,
it no longer looks like the rebates will go straight into the gas tank.
So, concludes Gavekal, it’s time for a bullish dollar call. “Indeed,
as the short-USD trade unwinds, many foreign borrowers will scramble to
repay their dollar debt; and if there is “good news” from the US, panic
dollar-buying could ensue….”