• The USD continues to see capital flows into the currency.

• What is the dollar doing against the other majors.

• The US economy continues to outperform the ROW(Rest Of World).

The USD train

Capital flows continue to move into the United States Dollar. This is happening for two main reasons:

1. Federal Reserve with their higher for longer approach to interest rates

2. U.S. Economy holding up steady despite interest rate increases

                                                                                                      FX flows. Source: FXMacro substack

From the image above we can see capital flows into the USD outperform all other G10 currencies on a 1 week & 1 month basis. The Fed has stood strong on their stance that rates will be higher for longer. As well as warning their will be “Pain” ahead!

Kind of scary to hear from a governments Central Bank.

This shows the persistance & determination by the Fed to do whatever it takes to get the inflation rate down to their 2% target. It is hard to see a pivot from Powell when we are 4 times above the 2% target. It will be a very interesting 2022 and 2023

Expectations are a huge driver

When it comes to currency trading, it’s important to remember that market participants’ expectations can cause an appreciation or depcreciation a currency.

The current pressing catalyst & expectations are that the Federal Reserve will continue to tighten monetary policy via:

• Increasing the EFFR

• Quantitative tightening

The important thing to keep in mind is when will the point be where expectations are not in alignment with the reality. Will there be time when the Fed has completely forgot about their “soft landing”, crash the economy, and reality is they need to start the easing process up again?

Its something to keep an eye on!

How is the $ performing against other currencies?

I prefer to look at the USD index where the Dollar is evenly weighed against the 7 other major currencies. EUR, GBP, CAD, JPY, NZD, AUD, CHF.

The Dollar has made an impressive run up to highs. If the Fed continues to keep the brakes on, and hike higher than market expects or keep rates higher than ROW. We could see this Dollar make new highs. Not only that, if markets continue in risk off mode we could see Dollar bid to the 2020 highs made during COVID.

The High around 420(pun intended)

Rest of the world

It’s a well known USD trait that when the rest of the world slows, you see flows into the Dollar. If we take a look at some of the major economies, we can see other major economies have been slowing

Euro Area manufacturing PMI has continued to remain in contractionary periods. 50 is the line in the sand between contraction(below 50) or expansion(above 50)

Japan continues its decline towards the contractionary 50 level. There is a chance we could see a slid into contraction in Japan PMI. We will touch on BoJ monetary policy another time..

United Kingdom has continued to get beat down like whack-o-mole! The UK is deep into contractionary. Crazy thing here..

I do not see it recovering in the near term. Pretty wild!

To sum things up

I see the USD continuing to outperform the ROW. The Fed will most likely keep rates high until prices come back down to their 2% target. We have seen slight optimistic data in the US that could bolster the Feds reasoning behind rate hikes. Biggest driver to watch will be how the ROW continues to perform. Watching G10 economies and some major emerging market economies.

I must say, It’s been a heck of a ride the last 2 years in markets and don’t see it stopping.

Yet!

FS