We are measuring financial stress by the yield differential between three-month commercial paper and the three-month Treasury bill. Looking back at FX performance during periods of financial stress, we have noted that the dollar brings mixed performance, we would argue that it can still underperform during increasing tensions in the financial system, especially since the magnitude of the severity of recent developments appears to be smaller.
Dollar performance during rate spread widening was mixed, we saw strength vs high-beta EMFX, but softness vs European FX. On days when the three-month commercial paper and the three-month Treasury bill spread widened by more than 70 basis points, the dollar typically strengthened vs most currencies, except for other safe havens and GBP. This suggests that the dollar should still rally if the current situation worsens and becomes more systematic.
- Goldman Sachs
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