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The USD Index has become a pariah, and\u00a0silver couldn\u2019t be more happy. However, the pessimism plaguing the greenback is much more semblance than substance, and it\u2019s likely only a matter of time before King Dollar reclaims its throne.<\/p>\n
To explain, the EUR\/USD<\/a> accounts for nearly 58% of the USD Index\u2019s movement. Consequently, it\u2019s the most influential currency pair in the basket, and its recent rally has driven the index\u2019s drawdown. Yet,\u00a0euro optimism contrasts the realities on the ground, and the bulls should suffer mightily in the months ahead<\/strong>.<\/p>\n<\/div>\n<\/div>\n The green line above tracks the EUR\/USD, while the red line above tracks Citigroup\u2019s Eurozone Economic Surprise Index. For context, a positive \u2018surprise\u2019 occurs when a data point outperforms economists\u2019 consensus estimate, while a negative surprise is the opposite. And if you analyze the right side of the chart, you can see that the red line has crashed, as Eurozone economic data has come in much weaker than expected.<\/p>\n Therefore, while\u00a0gold<\/a> benefits from the euro\u2019s uprising,\u00a0the ominous fundamentals plaguing the Eurozone should come home to roost and uplift the U.S. dollar<\/strong>.<\/p>\n As further evidence, the German ZEW Economic Sentiment Index declined by 6.2 points MoM, falling to -14.7 in July. ZEW President Professor Achim Wambach said:<\/p>\n \u201cThe ZEW Indicator of Economic Sentiment is shifting even more noticeably into negative territory. Financial market experts predict a further deterioration in the economic situation by year-end. A key reason for this is the expectation of rising short-term interest rates in the eurozone and the USA.<\/p>\n \u201cAdditionally, important export markets like China are seen as relatively weak. The industrial sectors are likely to bear the brunt of the anticipated economic downturn, with profit expectations for these export-oriented industries experiencing a substantial decline once again.\u201d<\/p>\n Thus, while no one cares right now, investors\u2019 appetite for European risk assets should come under immense pressure over time, and\u00a0the USD Index should be a primary beneficiary<\/a>.<\/p>\n Please see below:<\/p>\n<\/div>\n<\/div>\n To explain, the black line above tracks the monthly movement of the iShares MSCI Eurozone (EZU) ETF, while the red line above tracks the German ZEW Economic Sentiment Index. As you can see, when weak economic sentiment plagues Europe, its stock markets suffer mightily.<\/p>\n Yet, if you analyze the right side of the chart, you can see that the EZU ETF closed at a new 2023 high on Jul. 13, while the ZEW ESI has materially diverged. However,\u00a0since 2009, the EZU ETF has not been able to prosper when the ZEW ESI crashes and this time should be no different<\/strong>.<\/p>\n To that point, please turn your attention to the blue line at the bottom, as it tracks the USD Index. If you analyze the vertical gray lines, you can see that\u00a0when the EZU ETF peaks and begins its descent, the USD Index bottoms and begins its ascent<\/strong>.<\/p>\n So, with the ZEW ESI an ominous indicator of what\u2019s to come for the EZU ETF (European stocks), the former\u2019s decline should intensify as the global liquidity drain continues, making the divergence even worse. Therefore, don\u2019t be surprised if the USD Index has the last laugh.<\/p>\n<\/div>\n<\/div>\n While the crowd assumes the inflation battle has already been won, these same folks thought a pause meant the BoC\u2019s rate-hike cycle was over. Although, with Fed officials still immensely hawkish and demand proving resilient, BoC Governor Tiff Macklem (Canada\u2019s Jerome Powell) said on Jul. 12:<\/p>\n \u201cHigher interest rates are needed to slow growth of demand in the economy and relieve price pressures. But even as headline inflation has come down largely as we forecast, underlying inflationary pressures are proving more persistent than we expected.\u201d<\/p>\n Thus, with base effects over in the U.S. and Canada, and\u00a0lower oil prices a thing of the past, the crowd is celebrating when the easiest part of the inflation fight is now over.<\/p>\n<\/div>\n<\/div>\n Overall, asset prices have decoupled from economic reality, as\u00a0the S&P 500\u2019s profound rally<\/a>\u00a0has impacted other areas of the financial markets. And while stock investors are known to price in unrealistic expectations, misguided optimism has seeped into the bond, FX, and commodities markets. However, unanchored inflation does not abate alongside loosening financial conditions, and we believe this cycle doesn\u2019t end without a recession.<\/p>\n Do you think the euro rally has legs?<\/p>\n<\/div>\n<\/div>\nBenefiting from Euro\u2019s Uprise<\/h2>\n
Macklem Musings<\/h2>\n