Cool Video: Financial Times James MacKintosh on the Dollar

This Cool Video comes from the Financial Times. James MacKintosh discusses the breadth and magnitude of the US dollar's rally.  He cautions that the dollar is priced for perfection and that the market is vulnerable to a pullback.  He discusses one possible trigger:  disappointing US data.    We think this is precisely the risk.    

We have identified some preliminary evidence that the labor market may be losing some momentum after a historic stretch of 200k+ monthly increases in non-farm payrolls.  Weekly initial jobless claims bottomed in July.  There has not been a sustained rise, but the improvement has stalled.  The Markit flash PMIs also point to an economy that has lost some momentum late in the quarter.  The composite flash PMI of a still-high 58.8 is a four-month low.  

At the same time, the dollar's gains in recent sessions were not driven by higher US interest rates. The dollar bull case was that both axes were moving--favorable news in the US and unfavorable news in the eurozone and Japan, and a slowing of China's economy.   We think that the US ax is more vulnerable, and that the market places too much weight on the dot plot and Fed forecasts and not enough on the dovish statement and the decline in inflation expectations.  

The negative fundamentals in Japan and the euro area remain so.  The market is looking ahead not just to next week's ECB meeting, where details of the ABS purchase scheme will be announced, but also just as importantly, the flash CPI print next week.  

Many participants are skeptical of the salience of the recent comments from various sources in Japan, including seemingly the Prime Minister, cautioning against continued yen weakness.  Many seem to be dismissing it as posturing ahead of the G20/IMF/World Bank meetings and the upcoming US Treasury report on the foreign exchange market and international economy.