Jeff Gundlach has been horribly wrong all year but don’t let that stop him! Via Bloomie:
Two of the biggest names in finance are predicting that the US dollar could face some big bumps ahead following its recent rebound.
Ray Dalio, who founded the world’s biggest hedge fund at Bridgewater Associates, said the dollar could face a “crisis” two years from now and the currency may fall as much as 30 per cent. In the nearer term, Jeffrey Gundlach, chief investment officer at DoubleLine Capital, predicted a decline for the greenback by year end.
Gundlach has been short DXY and long commodities all year. Whoops. Dalio makes more sense.
The US cycle will come a-cropper at some point and when the Fed is forced to ease then the DXY will fall. The penciled-in trigger for the weakness is the fiscal cliff that kicks in later next year:
But this is only one factor:
- the trade war will repatriate some activity;
- Trump will not want to see slowing so will seek more stimulus, perhaps infrastructure;
- if Dems win the House in mid-terms then DXY will likely fall on political risk but it also raises the prospects for stimulus;
- Washington deadlocks are usually good for stocks.
As well, with US wages now rising we’re on the verge of a self-fulfilling cycle of growth. So long as they do not overheat then profits will keep rising with top-line growth even as margins ease. US decoupling could run further than most expect. Or, the Fed might overdo it.
If it results in a stocks crash then the USD will also rise then fall as the crisis subsides.
Then there is the non-US forex world. The recent rebound in DXY has really been the EUR weakening as its growth stalls. That has improved a little recently but I still expect to slow more.
Adding more upside to DXY is the falling CNY as China slows with the trade war making it worse. No to mention routed EMs. Or, China might hit the gas again and put a bid under CNY.
There are lots of scenarios that could play out. What is most important to remember is that the forex moves are only one dimension of it. If DXY does fall then the S&P500 will very likely lift. Indeed, since 2009/10, there is no scenario in which the S&P500 did not outperform local shares, DXY up or down:
That’s why the MB Fund is long US equities, not just the USD or AUD.
