Swiss National Bank President Jordan has also come out saying that there's a limit as to how far rates can go down.
Commodity currencies
If you see a trend above, these are all European currencies. In contrast, so-called commodity currencies (e.g. the Australian dollar and Canadian dollar) have not been at zero or in negative territory. The dynamics there have also not followed traditional patterns. Still, Mr. Poloz, the head of the Bank of Canada (BoC), last week stated that the BoC wants to see how fiscal policy plays out before deciding on whether to cut rates further. Canada is one of the few countries that appears to be getting a serious fiscal stimulus (Prime Minister Trudeau was quick to discard his election promise to only have minor deficits).
Australia is a bit of a special base, as central bank governor's Glenn Stevens term is expiring later this year; if we understand Mr. Stevens correctly, he wants out as the governor that did not need to resort to extraordinary policies. Indeed, the Australian economy has rapidly been adjusting, with the weaker Australian dollar helping.
New Zealand, also considered a commodity country, in contrast, just lowered rates again, a reflection that the economy might have a more difficult time adjusting than Australia's.
Emerging markets
All that said, before we get too far ahead of ourselves, let's have a look at emerging market currencies. After declining rather substantially, they may be due for a rebound. But let's not forget that these tend to be tightly managed currencies. The dynamics there, in our analysis, are much more driven by liquidity than many other factors. And may make these currencies move more in tandem with U.S. equities.
Stock market?!
At the risk of oversimplification, the dollar's fate over the coming months may well be decided by how the stock market is doing. In many ways, the Fed's actions may also be tied to how the stock market is doing (but that's an analysis for another day). If our analysis is correct, a rising equity market may bode well for the U.S. dollar; a falling equity market may bode poorly for the greenback.
We may be a tad biased, having provided an analysis last August that we think a bear market is upon us. In the context here, we might want to add that sovereign wealth funds may need to sell U.S. dollar denominated investments to cover budget shortfalls back home, providing pressure on both equities and the greenback.
To expand on the discussion, please register for our upcoming Webinar entitled 'Black Swans?' on Thursday, March 23, to continue the discussion. Also make sure you subscribe to our free Merk Insights, if you haven't already done so, and follow me at twitter.com/AxelMerk. If you believe this analysis might be of value to your friends, please share it with them.
Axel Merk is president and chief investment officer of Merk Investments.