Sure, big picture the idea that the Fed is going to continue to raise rates while rates stay unchanged in Europe underpins the consensus expectation of a stronger dollar in the fullness of time. But right now it’s hard to see immediate USD strength, especially against the EUR (and SEK).
1) The US data has been weak, especially on the manufacturing side. Industrial production and the Empire index on Friday underlined this. This is in part a global story, but the European numbers have been more stable, and the Swedish numbers positively strong.
2) True, the US employment data remains strong, but the lack of wage growth and the weak oil price suggest this isn’t going to be enough to translate into another near term rate hike, and there is a concern that employment is a lagging indicator. Retail sales were also weak in December, and the Atlanta Fed GDP nowcast currently suggests 0.6% annualised for Q4 (i.e. 0.15% q/q) after Friday’s weak data.
3) Spreads have edged against the USD because of the weak data, with the T-note/bund spread at 155bp the lowest since late October, when EUR/USD was above 1.11. This has been a close correlation in the last 9 months or so.
4) Risk appetite is low, and few see real value in US equities even if we see a risk recovery. The safer havens have done well in the last few days, but the EUR is still in the middle of its recent range while risks and spreads suggests it should be pressing the top.
5) The SEK has suffered from the general risk off tone, but it is not at all clear that it should now it is one of the lowest yielders and biggest surplus currencies. At this level of the currency, it is also clear that any rate cut or intervention threat has disappeared.
6) Positioning remains long USD despite the poor news, and to some extent the USD may be enjoying some safe haven characteristics while markets are jumpy, but it’s hard to see the fundamental value at this level against the EUR and SEK if US rates aren’t rising.