31/01/2023 15:22 Smile, you’re on USD | Financial Times FT Alphaville Currencies Smile, you’re on USD StanChart gets cheeky Louis Ashworth JANUARY 26 2023 It’s standard Alphaville practice to thank our sources, but deep down we wish Claire Jones had never shared this chart. “A smile is the chosen vehicle of all ambiguities,” begins a note published today by Standard Chartered’s global research division. Forex research head Steve Englander writes: A number of clients have expressed concern that the slowing of the US economy and potential equity-market underperformance will cause the USD to transition quickly from the USD-negative part of the dollar smile to the risk-off, USD-positive segment. We think that the USDnegative portion of the smile may be broader and flatter than feared (the ‘Mona Lisa’ smile shown in Figure 1 [above]), in contrast to the more steeply sloped ‘Joker’ smile. https://www.ft.com/content/0e158590-4388-4e4f-966f-3cf795a9183a?accessToken=zwAAAYYIaECXkc8OFYWQQ4hOT9OWbzz3lakYOg.MEUCI… 1/4 31/01/2023 15:22 Smile, you’re on USD | Financial Times Expanding on this, he notes: — The easing of Fed rate-hiking expectations reduces the probability of a dollar liquidity crisis among foreign private and sovereign borrowers. — Provided the US economic downturn is moderate, lower US policy rates may translate into lower risk premium and higher expected real yields on risky assets. — Global activity and policy rate divergence widened unusually in favour of the USD in 2022, and we are now returning to more normal divergences. — Europe’s improved energy security and China’s reopening are positive growth shocks that will likely insulate non-US markets to some degree from a US economic slowdown. — The USD remains strong in real terms (Figure 2), and we expect restored global supply chains to allow non-US producers to exploit cost advantages to a greater degree than when supply chains were disrupted. — Global equities are starting from a very low valuation versus US equities in common currency terms. For anyone meeting the ‘dollar smile’ for the first time, it’s the theory which states the dollar strengthens when the US economy is performing either relatively well OR when it’s doing badly, but weakens during periods of broad global growth. Per Nordea: https://www.ft.com/content/0e158590-4388-4e4f-966f-3cf795a9183a?accessToken=zwAAAYYIaECXkc8OFYWQQ4hOT9OWbzz3lakYOg.MEUCI… 2/4 31/01/2023 15:22 Smile, you’re on USD | Financial Times Englander’s a long-term fan of the smile theory, and we have to accept that, basically, there’s some sense to it. We simply can’t, however, endorse this taxonomy. Mona Lisa *kinda* works: OK, she maybe looks like she’s trying to block two simultaneous nosebleeds On the ‘Joker’ smile, we’re just lost. Whose mouth are we supposed to use? https://www.ft.com/content/0e158590-4388-4e4f-966f-3cf795a9183a?accessToken=zwAAAYYIaECXkc8OFYWQQ4hOT9OWbzz3lakYOg.MEUCI… 3/4 31/01/2023 15:22 Smile, you’re on USD | Financial Times What other smile shapes would you like to base an investment strategy on? Answers below the line, please… Copyright The Financial Times Limited 2023. All rights reserved. https://www.ft.com/content/0e158590-4388-4e4f-966f-3cf795a9183a?accessToken=zwAAAYYIaECXkc8OFYWQQ4hOT9OWbzz3lakYOg.MEUCI… 4/4
