Contrasting macroeconomic signals leave the Dollar looking for direction – Month in Review: July 2021
Macroeconomic Environment Review
Currency markets have struggled for a clear direction so far this year. The Dollar rebounded in Q1 on the vaccination advantage in the US and fell back in April and May as other major economies accelerated their vaccination programs. The US currency rose again in June on more hawkish Fed projections but the rally stalled in late July on softer US economic news and less hawkish Fed commentary. The near-term outlook is full of mixed signals and a clear trend may not emerge for a while.
The prevailing view is that the US Dollar strength so far this year was not consistent with fundamentals. The economy fell short of expectations (Q2 GDP disappointment), while the twin deficits remain a dead-weight around the USD’s neck. Still, other factors are supporting the buck: the spread of the Delta variant, concerns over China’s growth and IT quarrels, spreading Fed tapering talk as well as tightening USD liquidity as the debt ceiling becomes binding. How these factors and risks play out is uncertain and the result may be more volatility within a sideway range.
Across the various pairs, we expect the Euro to trade sideways for the coming weeks to months as the macro background collides with the technical outlook for the currency pair. We hold a similar view for the British Pound, with the overcrowded Sterling long position now gone but the UK economy still producing a deficit, limiting the upside.
Performance Review July 2021
Across the spectrum of our benchmark indices, our performance during July was slightly negative. As a comparison, AENAON Syncro Currencies returned -1.40% last month, versus a 2.28% return for the US S&P 500 equities index, a -0.24% decline for the Barclay Hedge Fund Index, a 0.33% gain for the Barclay CTA Index, a positive 0.55% return for the Currency Traders Index and a 0.36% uptick for the Systematic Traders Index.
Chart 1: Performance vs. Benchmark Indices – July 2021
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