Nomura currency guru Jens Nordvig writes:
The turn in JPY (yen) has been dramatic and has proven the importance of momentum when a multi-year cycle turns. A similar dynamic could be in store for the dollar. In the scheme of things, the USD REER (Real Effective Exchange Rates) is still trading close to multi-decade lows. Once the turn is evident, we believe momentum could be powerful.
On this basis, we think it is now time to put on some structural positions, looking for meaningful USD gains by year-end. We structure these positions to be resilient to near-term two-way risk. We would also look to add spot exposure should we better entry points be reached over the next one to two months.
Nordvig’s commentary is consistent with market action and other commentary in recent months making the base for dollar bullishness, and the return of king dollar.
Factors that are causing people to get bullish:
- US economic outperformance.
- The likely increase in US real interest rates, at least relative to major economies like Europe and Japan.
- The rise of domestic energy.
- The overall decline of the commodity complex, as the great commodity bull market of 2001-2011 fades.
- The shrinking trade deficit.
The dollar has had a great run this year, but as you can see on this chart of the Trade-Weighted Dollar Index going back several decades, the dollar’s been in a pretty huge bear market which has a lot of room to turn.
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