Finance 0

Back To The Future: A US Dollar Bear Market?

By Kurt Osterberg · On September 10, 2017

This slide package is our Knowledge Leaders Strategy mid-quarter update and can be downloaded at the link below.

The discussion is broken into three sections:

SECTION 1: History does not support the view that the USD is propped up by a monetary tightening cycle. The US Dollar’s moves are more fundamentally based on aggregate savings, which have been declining for a couple years. The President’s falling approval rating and normalization in the energy markets may be the catalyst for the USD to enter a bear market.

SECTION 2: While it is hard for investors to comprehend how possibly interest rates can fall while commodities rise and foreign equity markets outperform, one need only look back to 2002-2007 to see the dynamics. We have been in a USD bull market since 2008, but in 2001-2008 we were in a USD bear market, and things are different depending on which regime we are in. If the US Dollar has indeed begun a bear market, we would expect to see the late cycle sectors (energy and materials) meaningfully outperform for the medium term, commodity prices to rise, and at the same time we think US Treasury rates can work meaningfully lower. We would also expect sectors like technology, health care, and consumer discretionary to underperform. Regionally, the emerging markets and ex-US developed markets should be well situated.

SECTION 3: On the fixed income side, we think commodity linked currencies should do well. Australian and Canadian bonds performed well in the 2002-2007 period. The recent turn up in the AUD and CAD may be presaging a turn in the relative performance of the government bonds of each country (in USD terms).

Section 1: US Dollar Bear Market

Do monetary tightening cycles support the USD? Historically, not really.

The business cycle drives the US Dollar. When the combined savings of the business, household and government declines, the US Dollar falls.

The other reserve currencies are cheap. The Euro is undervalued by about 6% using our basic purchasing power parity (PPP) model over the last 20 years.