FX markets in New York morning trade, we are looking at the US currency nearly flat against all the other majors, but at the same time we're looking at the dollar index hovering right around 99.
Now at the same time of fiscal concerns as well as Treasury yield maneuvers and mounting trade tensions are weighing on the US currency while talk of the debasement.
Trade drives rallies and gold as well as Bitcoin.
A collapse in US-Canada trade talks is also weighing on the Canadian dollar.
Joining us to make sense of what's moving currency markets as well as the volatility is VP and global head of market strategy at BBH's foreign exchange team.
Elias.
Good morning and good afternoon to you.
Thank you so much for joining.
So there is a lot happening across all asset classes, but when we look at the US currency and what's been affecting the greenback, what do you make of the latest announcements out from the US Treasury Department?
And do you think attempting to manage long-end yields risks diverting the pressure directly onto the US dollar?
Well, thank you very much, Remy, for having me.
Uh, indeed.
I mean, there's a few, there, there, there's several factors here that have influenced currencies, at least the dollar, lately, you have, you know, one story is the fact that the US economy continues to outperform other major economies.
So in a sense that is supportive here for the US dollar.
Uh, there's also, I guess, the, the increased likelihood that we could see a, a dovish repricing, uh, in the Fed rate expectations that is limiting, uh, any significant relief rally here in the US dollar, and as you pointed out, one of the big structural drag here for the US dollar is the, um, uh, the, the, I guess.
The more worrisome, uh, US or the lack of US fiscal credibility, and, um, you know, when, when I look at the, the, the, the intervention from the Treasury uh last week and with, with respect to the buyback, I mean, overall, it's a small amount, it's tiny in the grand scheme of things, considering that the Treasury market is, you know, over 30 trillion.
So, you know, boosting the buyback or doubling it to 4 billion, it means absolutely nothing.
But to me, it's, it's, uh, it blurs the line, at least this intervention blurs the line between, you know, improving market functioning and suppressing borrowing costs to contain fiscal stress, and that is a big, that to me.
Is, is, is the biggest, um, I guess the biggest drag here uh for the US dollar, whether it's cyclical or structure, I'm, I'm more leaning towards this is more of a structural story than an immediate and a more cyclical story because it simply adds to this lack of US fiscal credibility.
Um, the Treasury Besant, uh, tried to appease those fiscal concerns by saying, you know, the, the White House is about to come up with some, uh, fiscal consolidation plan, uh, quite soon, but it's difficult to take this seriously because you've got the CBO projects budget deficits, uh, as far as the eye can see, and the debt to GDP ratio rising to a record of 120% of GDP by 2036.
Um, so I don't see any credible way out of the, the, the, the, the fiscal, uh, uh, the unfavorable fiscal dynamic in the US, but this is not a near-term drag.
It's more of a long-term drag on the dollar, uh, via raising the term premium.
And, and, um, uh, it's, uh, but, but more cyclically right now, the big support for the US dollar, and that's why I don't, I think the dollar is, is, or if you, if you look at the dollar index, I think we're trading in this 96 to 100 range.
Well, one of the reasons I don't expect new cyclical lows here for the dollar is because the US economies, uh, the US economy continues to outperform other major economies.
That's a big supporting factor here for, for the US dollar.
Yes, and Elias, while I have you here, you just mentioned global economy.
So I do want to shift our focus on over to the US neighbor up north Canada.
So we have been paying attention to the loony, which dropped sharply after U.S.Canada trade talks collapsed and also tariff threats have escalated.
So how much further do you think the Canadian currency can fall, and this does obviously put pressure on the central bank up there.
So what do you think the BOC will be doing?
Yeah, it's a great question.
Um, the good thing, the good news here is that the Bank of Canada is well placed, um, and the, the, you know, these extra tariffs or this worsening in the trade war between the US and Canada and Canada, certainly a drag on Canada's economy, but the good news is the Bank of Canada has room to act because core inflation.
Uh, whether you look at the policy relevant measure from the Bank of Canada or simply the, the, the, the, the, the core excluding energy and food remains quite contained around 2%.
So the Bank of Canada has room here to keep interest rates on hold and support, uh, economic activity, uh, during this, uh, uh, uh, during this uh nasty.
Uh, a, a trade war.
Now, obviously, it doesn't, the, the, the, there is a pretty big likelihood of a dovish repricing in Bank of Canada rate, uh, pricing, considering I think the market is looking for 75 basis points of hikes over the next 12 months, uh, in Canada.
I think, I think that's way too aggressive in the current.
Uh, uh, trade, uh, context.
So, um, this dovish repricing in Bank of Canada rate expectations, uh, will be, uh, a bit of a drag here for the Canadian dollar.
So I think that the dollar cat should trade closer to $140 but a bigger overshoot north of $140 I think is unlikely because not only are we going to see perhaps a dovish repricing in Bank of Canada rate expectations, but I think.
I think we'll also see a dovish repricing in Fed funds rate expectations.
Lastly, before I give it back to you, I'll explain why you got the labor market in the US quite in balance.
You have Fed policy that's already quite restrictive and the wage growth in the US is actually growing in line with the Fed's 2% target, given the favorable productivity landscape uh in the US.
Back to you.
Yes, and Elias, finally we have less than 60 seconds here.
So the debasement trade, do you think this is a structural shift, temporary reaction to fiscal noise, or just a continuation of what we have been seeing?
I think it's it's a bit of noise, but it's also, it reinforces this structural decline here in the US dollar.
Um, but think about it right now, the US, the dollar still dominates as a medium of exchange, as a unit of account, and as a, uh, um, a store of value.
That's not going to change anytime soon.
But, uh, certainly the lack of fiscal credibility, uh, is a, is a long-term drag on the dollar, and we'll continue to see a bit of a, um, a, a diversification away from the dollar into other, uh, currencies.
Well, Elias, I appreciate you joining us today.
Thank you so much for weighing in and as always, thank you so much for your insight as well as analysis.
Thank you, Remy.
