US dollar rampages worldwide

The US dollar bull market has broken out to its highest point since 2003. All other majors are tumbling, including the yuan:

Commodity currencies were mostly down too with the Aussie doing catch-up:

Gold held on but I think it’s going lower yet:

Brent held on too:

Base metals fell:

As did big miners:

US and EM high yield as well:

EM stocks rallied:

US bonds sold but the curve flattened:

Italian spreads widened again:

And US stocks fell:

The USD inflation trade is the only game in town. From the BofAML monthly fundie survey says it all:

Inflation expectations surge

Global growth and profit expectations rise to one-year highs; inflation expectations soar to 12-year highs; number of investors expecting yield curve steepening surges by record amount…US election result seen as unambiguously positive for nominal GDP.

Cash levels slump

Cash levels slump from 5.8% to 5.0% in Nov (= largest MoM drop since Aug’09); this not yet a tactical negative, but a drop in cash to <4.8% in Dec would be (as a 1ppt fall in two months historically causes risk sell-off). Note Nov FMS does not reveal Great Rotation from bonds to stocks; allocators have room to raise equity weightings in coming quarters.

Big sector & regional rotation

Election accelerates rotation into Banks, out of high dividend yield and bond proxies (e.g. Utilities, Telcos), and catalyzes buying of US equities, selling of Tech and Emerging Markets (biggest MoM drop since Feb’11). FMS shows growing conviction in “inflation trade”: majority of investors say cyclical rotation should continue “well into 2017”.

Crowds & risks

Biggest tail risk = “stagflationary bond crash”…crowded longs (Minimum Volatility, US/EU credit, long EM debt) remain vulnerable to further jump in yields. In contrast, political rhetoric to calm “protectionism” fears (which jumped to highest levels since 2009) would boost risk appetite.

The Contrarian Trades

Long UK assets unambiguously contrarian (e.g. GBP = most “undervalued” on record). Long active vs. passive (FMS investors forecast market share of passive to rise to 40-49% equity AUM in 3 years). There will likely be a trade in “bond proxies” soon but our cyclical view of peak liquidity, globalization, inequality means the “yield” dam has been broken.

Not much doubt there. Obviously it’ll take a breather at some point. The USD is overbought now. But I still see a pretty straight march upwards for the DXY to $1.10, with emerging markets and commodities sinking in its wake.