USD catching up – Nordea Markets

The USD has indeed started to catch up to where it "ought" to have been trading with regards to relative economic surprise indices, according to analysts at Nordea Markets. 

Key Quotes

“One reason why the dollar has been gaining is weakness in the rest of the world, meaning that the dollar is actually gaining for bad reasons. This is one reason why equity markets and emerging market are faring worse recently.”

“The last time the difference between the US and EMU surprise indices got as big as today (in 2012), EUR/USD dropped by 8% on the quarter. A similar move today would drag the pair to 1.12 by early July. However, we have recently seen a range of US data disappointments. ISM manufacturing and non-manufacturing were both weaker than expected, and non-farm payrolls has undershot expectations.”

“As a result, the US economic surprise index has started to deteriorate and further downside beckons. The gap between the EUR/USD and the relative surprise index will thus close both via a stronger USD and via weaker US data, so 1.12 looks a stretch. While we have been predicting a decline in EUR/USD since the start of this year to 1.20-21, we hold on to our short for now (at least until 1.1850). We do not believe positioning has adjusted enough and price-action has been constructive for the dollar.”

“Next week may also offer some news on the political deadlock in Italy. Last week the leader of the 5star movement, Luigi Di Maio, called for new elections, seeing “no other solution” to the deadlock. While the political mess in Italy has likely only played a very secondary role in the recent weakening of the EUR, new elections (likely ending in a new deadlock) re-affirms our current EUR/USD short conviction.”