MorningWord 3/15/16: Dollar Bill Y’All

by Dan March 15, 2016 • Commentary• Morning Word

Much of the volatility in global risk assets since mid 2014 is a result of 20% rally in U.S. Dollar (DXY) from its May 2014 lows to its March 2015 highs:

DXY since Jan 2014 from Bloomberg
DXY since Jan 2014 from Bloomberg

The DXY rallied as investors started to price in the end of Quantitative Easing (QE) at the end of 2014. It has since remained bid but has spent the better part of the last year trading within a fairly tight range between $95 and $100 as investors started to price the potential for the end of the Fed’s Zero Interest Rate Policy (ZIRP).  Yep, and the collapse in oil and industrial commodities starting in 2014 were made possible bu dollar strength that did not exist in the age of QE and ZIRP.

I have heard plenty of technical and fundamental arguments as to why the dollar’s consolidation of the last year is coming to an end, but the following charts from JPMorgan, reposted by @SoberLook suggest that the eventual breakout (of the one year range) may be to the upside, not downside:



The take-away for U.S. corporate earnings is that the dollar has not needed to go higher from 2015 levels to inflict further damage on profits, merely staying high is enough to do damage.  For comparison purposes, if the dollar stays high but stable, year over year 2016 should look better than 2015 for dollar impact due to something you’ll be hearing on earnings results and outlooks called “constant currency terms”. But that doesn’t mean the dollar strenght isn;t still hurting. It just means they can quantify the pain.

And a further breakout of the US dollar could be the single biggest risk to higher stock prices in the U.S., especially considering headlines like this from @Factset: