Saxo Bank has published its Q4 2018 Quarterly Outlook for global markets. Against an uncertain backdrop, the Outlook offered some interesting insight into the US Dollar.
The reaction of the US dollar to developments in US yields has been an on-again, off-again affair, but a sharp rise in US yields in late Q3, after strong wage inflation data were reported for August, resulted in a weaker dollar for much of September.
From here, whether rising US yields continue to squeeze global USD liquidity and especially emerging markets, could depend on China’s intentions for the renminbi.
Regardless, if US rates and the USD both rise further, the first would quickly break US markets and eventually the US economy, and together would likely break the global economy, particularly the emerging markets that most indulged in USD-denominated borrowing via the Fed’s zero interest-rate policy years after the global financial crisis.
John Hardy, Head of FX Strategy, Saxo Bank, noted: “The direction of the US dollar remains the key driver of action as we go from a late US monetary policy cycle to potentially the end of that cycle in a more concentrated and immediate timeframe than the market or the Fed anticipates. The US dollar and US rates can only rise so far from here before something – or rather more things – break.
“US long yields have crossed the Rubicon in technical terms, and a further aggravated rise in yields cannot be excluded in Q4.
But higher rates will eventually put the brakes on the US recovery, something that may already be happening as Q4 gets under way.
Q4 may be the quarter in which the USD finds a local top, if it hasn’t already, and then is toppled into reverse as the market figures that the Fed has taken things too far.
Timing is the chief risk as we must deal in probabilities and the risk that we are a quarter or more too early.”
You can access Saxo Bank’s full Q4 2018 outlook, with more in-depth pieces from their analysts and strategists here. You can find out more about Saxo Bank’s UK business, Saxo Capital Markets, here.