2015-01-21

Dollar Rally Still In The Early Stages

The Canadians just cut rates, sending the loonie lower.
Don't Lose the Forest for the Trees: Dollar Rally Still in Early Days
We have identified that the key policy signals from the Federal Reserve emanate from its leadership (Yellen, Fischer and Dudley). They continue to suggest a rate hike in the middle of this year is still the most likely scenario. If the market pushes its expectations out into later this year or even next year, it would impact the pace of the dollar's advance. However, in the big picture, we have little doubt that the Fed will indeed raise rates before the other central banks in the G10.

In addition, the US economy expanded above trend after the largely weather-induced weakness in Q1 14. The consensus is for the US economy to expand by a little more than 3% in 2015. Even if growth is a bit slower, the divergence between the US and other high income countries will remain significant.

There will be near-term volatility, and while currencies trend, the trends are not smooth. There is no substitute for disciplined risk management. That said, we see much life left in the dollar's bull trend.

How this dollar rally plays out is still an issue, but in terms of the previous dollar cycles, this is still early in the game. Years of gains or very large gains in a very short period of time are still to come.

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