(Bloomberg View) -- The dollar looks like it’s done being the sick man of the currency market. The greenback has suddenly taken off, with the Bloomberg Dollar Spot Index rallying for five straight days. The gauge has gained 2.05 percent over the period, the most since the aftermath of Donald Trump’s surprising electoral victory in November 2016.
The recent performance looks promising for the dollar, which has weakened for five straight quarters, but probably not all that surprising. The strength is largely being attributed to international traders and investors finally waking up to the big difference between the relatively high interest rates in the U.S. and the low rates in much of the rest of the developed world. But that situation has been in place for years. Perhaps a better explanation is that it’s become very expensive to keep betting on the dollar’s decline. Those bets paid off handsomely as the Bloomberg Dollar Spot Index slid 8.52 percent in 2017, but not so much this year with the dollar stuck in a tight range. As of last week, the euro-dollar exchange rate has been confined to a 4-cent range between $1.2155 and $1.2555 since mid-January, according to Bloomberg News’s Katherine Greifeld. That’s the narrowest three-month band since 2014.
At the same time, Commodity Futures Trading Commission data show that traders have near-record bets that the dollar will keep sliding. But with the dollar stuck in a range for so long, traders may have decided it was too expensive to keep betting on a decline, leading them to reverse their bearish bets, which can generate buying momentum. “The widening interest-rate differentials translate into increased costs of shorting the dollar if it is not falling,” the currency strategists at Brown Brothers Harriman wrote in a research note Monday.
The bond market suffered a case of cold feet on Monday. After driving 10-year Treasury yields up from 2.72 percent at the start of the month to 2.96 percent at the end of last week, the market was sure that Monday would be the day that yields breached the psychologically important 3 percent level. To be sure, they came close, with yields topping out at 2.9957 percent during European trading before ending the day at 2.977 percent. That failure could be an important development, according to Morgan Stanley, paving the way for a rally that sends yields back down to the 2.70 percent area. Fixed-income fund managers have been focused on the 3 percent level to gauge whether the three-decade bull market in bonds is at an end and to assess how much a glut of supply from the U.S. Treasury will weigh on investors, according to Bloomberg News’s Brian Chappatta. “A lot of investors that we speak with, when I ask them ‘Where would you want to enter the market and start to buy Treasuries?’, you’re typically hearing numbers like 3 percent on the 10-year, 3.25 percent on the 30-year,” Matthew Hornbach, global head of interest-rate strategy at Morgan Stanley, said in an interview at Bloomberg’s New York headquarters. Because those are such “common numbers,” they can drive momentum up or down, he said. Regardless, sentiment can’t get much worse. CFTC data show market positioning is near record-bearish levels for the 10-year note. On top of that, yields are higher than the 2.92 percent mid-year median forecast of the more than 50 economists surveyed by Bloomberg News.
WORSE THAN ARMAGEDDON
That’s the impression one gets from the excessive speculation about what would happen to equities if 10-year Treasury note yields rose above the 3 percent market, which hasn’t happened since the start of 2014. To one influential market commentator, yields would need to rise a lot further for stocks to take a real hit. While almost every major peak in bond yields since 1980 has coincided with declines in stocks, a trendline put together by Tom Lee, the co-founder of Fundstrat Global Advisors, points to a danger zone for stocks of 3.25 percent to 3.75 percent. The study is part of a model that informs Lee’s prediction that the trouble for equities would be a 4 percent yield, rather than 3 percent, according to Bloomberg News’s Lu Wang. This is the second time this year that a 3 percent yield emerged as a headwind for stocks. A similar spike in yields in February was blamed as one catalyst that sent the S&P 500 to its worst selloff in two years. While Wall Street strategists agree higher bond yields will hurt earnings and make equities less attractive, they differ on what levels would present a pressure point for the stock market. Some cite 3.5 percent, while others say it’s the pace of the increase in yields that matters. Despite troubled times for stocks so far this year, Wall Street strategists are maintaining their bullish bias, with a median price target of 2,944 for the S&P 500 Index, according to Bloomberg Intelligence.
After rallying from less than $50 a barrel in June, oil has hit a ceiling just below the $70 level. Hedge funds and their investors are betting prices won’t linger here for long. In fact, hedge funds investing in oil are luring capital at the fastest pace in more than a year, Bloomberg News’s Suzy Waite reports. Investors allocated $3 billion to commodity-focused hedge funds from January through March, the most since the third quarter of 2016, according to eVestment. Last year they pulled $680 million from the strategy in the first net outflows since 2014. Firms such as Westbeck Capital Management and Commodities World Capital see prices soon exceeding $80 a barrel. Until Friday everything seemed to point to oil extending its gains, with confidence in the global economy building and geopolitical tensions and production shortages showing no signs of going away. Then Donald Trump slammed OPEC on Twitter, saying prices are artificially high and will not be accepted. But the U.S. president’s threat to pull out of the Iran nuclear deal -- which allows the Mideast country to sell more oil in exchange for curbs to its nuclear program -- had been pushing prices up. And Saudi Arabia, the world’s biggest exporter, wants to push prices to $80 a barrel to help pay for the government’s policy agenda. Declining output in Venezuela and falling global inventories are also playing their part, as are the worsening tensions in Syria, which threaten to disrupt supply from across the region.
As strong as the dollar is, Mexico’s peso is just as weak. The currency is in the midst of its biggest slump since the aftermath of the U.S. elections in November 2016. It had weakened in each of the past five trading days, dropping 4.82 percent. For many, the big driver of the peso has switched from the Nafta trade talks to the realization that Mexico’s next president is likely to be the populist firebrand they feared, according to Bloomberg News’s Justin Villamil. That view was cemented Sunday night during the first election debate, when Andres Manuel Lopez Obrador -- who is known for a quick temper -- played it safe as rivals attacked his security and economic policies. That disappointed investors who hoped the confrontations would make the front-runner stumble. Lopez Obrador now has a more than 20 percentage point lead over the No. 2 candidate, Ricardo Anaya, who failed to inflict much in the way of damaging blows. Lopez Obrador has become the frontrunner by railing against “neoliberalism” and corruption, and vowing to roll back efforts to open up the state-run oil industry. “A lot of the risk isn’t priced in to valuations,” BlackRock’s Jack Deino, the asset manager’s head of emerging-market corporate debt, told Bloomberg News. The 64-year-old former mayor of Mexico City is making his third run at the presidency after losing narrowly in 2006 and by a wider margin in 2012.
This week investors and economists in the U.S. get an onslaught of housing data to digest. The main story up to now has been the lack of inventory on the market to meet demand. As a result, prices are rising at a decent clip. But now, mortgages rates are on the rise, tracking the increases in bond yields. Freddie Mac said last week that the average rate on a 30-year mortgage hit 4.47 percent, up from last year’s low of 3.78 percent in September and the highest since the start of 2014. Initially, rising rates tend to goose sales and prices as those potential homeowners who had been sitting in the fence decide to act before rates increase in further. We may see some of that in Tuesday’s new home sales data from the government. The median estimate of economists surveyed by Bloomberg is for new home sales to increase 1.9 percent in March to 630,000 units after a drop of 0.6 percent in February.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is editor of Bloomberg Prophets.
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