JPMorgan: Why you shouldn’t chase the US dollar rally higher

U.S. two-dollar billsPhoto by Leslie Shaffer

JPMorgan said it was staying largely neutral on the U.S. dollar as its recent bounce lacked a solid explanation.

The U.S. dollar index, which measures the greenback against a basket of currencies, had climbed as high as 91.8890 on Tuesday 1:07 P.M. SGT, up from around 90 at the beginning of April.

“Although this move has resulted in a definitive breakout of the narrow range the dollar has been confined to since mid-January, to us it resolves little of the uncertainties that had kept FX markets in directionless narrow ranges for much of this year,” it said in a note on Friday.

The bank noted that the rise in U.S. 10-year Treasury yields has been cited as a catalyst for the U.S. dollar move, but it added that didn’t really explain much.

The 10-year U.S. Treasury yield was at 2.96 percent at 1:20 P.M. SGT on Tuesday, after its recent push above the key technical and psychological 3.0 percent level.

“Without an obvious catalyst or meaningful new information, this does little to improve our understanding of the breakdown over the
preceding six months of the canonical FX/Rates correlation, nor does it give much confidence that the period of decorrelation has come to a definitive end,” it said.

JPMorgan also rejected other market explanations for U.S. dollar strength, such as pricing cyclical divergence  in favor of the U.S. or a shift to a more pessimistic global growth outlook.

“These would be compelling explanations for dollar strength except for the fact that these conditions are not new, had earlier been ignored by FX markets,” it said. “There is seeming little fresh information that would rationalize a sudden flight to safety in the dollar on account of global recession concerns. Even if belated, the recent modest downgrades to global growth might only justify 1-2 percent of the recent dollar gains.”

That’s left the reasons for the U.S. dollar’s rise unsatisfactory, it said.

“Without a proximate trigger, we’re left with the rather unsatisfactory explanation that the dollar’s rally is simply a lagged consequence of the cumulative widening in the dollar’s rate over past months, exacerbated by U.S. yields breaching symbolic levels, e.g. 3 percent on the 10-year,” it said.

JPMorgan said it was keeping risk light and was staying neutral on the U.S. dollar.

“Economics does not warrant chasing the dollar rally while technicals (positioning and valuation) cautions against rushing to fade it, at least in G10,” it said.