US DOLLAR FUNDAMENTAL FORECAST: BULLISH

The US Dollar has all but erased losses sustained against the backdrop of the prior week’s market rout. Its rebound did not coincide with returning risk appetite. Rather, the bellwether S&P 500 stock index is on course to finish the week little changed, unable to sustain a bounce after the third-largest drop in two years.

Recovery came courtesy of hawkish rhetoric in minutes from September’s FOMC meeting, as prior week’s market rout. Officials flagged risks linked to leveraged loans and a stronger currency but still unanimously agreed that gradual tightening is the best path forward. A rise beyond the “long run” level was even posited.

That deflates the idea that the Greenback has migrated to the risk-on side of the G10 FX sentiment spectrum. Indeed, the benchmark unit reclaimed its place alongside the Yen and US Treasury bondsthe very next day, rising amid risk aversion.

Expectant markets will not have a meaningful opportunity to relitigate the issue until third-quarter US GDP data comes across the wires Friday. A slowdown is expected but the annualized growth rate is still seen coming in at a brisk 3.2 percent. A particularly big miss might revive “Powell put” hopes somewhat.

In the meantime, festering trade wars and shaky politics threaten to keep risky assets on the defensive. Italy is still on a collision course with EU authorities, Brexit talks are at a stalemate, the US remains at odds with China and anti-establishment politicians have muddied the fiscal landscape from Sweden to Brazil.

The US Dollar seems like a natural beneficiary amid the kind of de-risking of portfolios that such a landscape encourages. It is precisely times like this that make its unrivaled liquidity most appealing. Before all else, a broad-based “cashing out” needs a vehicle able to smoothly absorb capital flows on a vast scale.