FX quarterly: The theme of fading "US exceptionalism" | Insight Investment

In our view, a prerequisite for a more sustainable decline in the USD is further evidence of a loss of "US exceptionalism". Once again, the news has been mixed. Forward looking indicators such as the PMI data continue to point to loss of "US exceptionalism: (see Figure 1) but data in other parts of the world, namely the eurozone and China, has slowed relative to both expectation and to the US (Figure 2).

Figure 1: "US exceptionalism": business surveys

Source: Macrobond. Data as of July 7, 2023.

Figure 2: "US exceptionalism": economic suprises

Source: Macrobond. Data as of July 7, 2023.

This has been reflected in the underperformance of US Treasuries relative to German bunds over the last few months as well as in the fact that the Fed Funds target rate is the second highest base rate across developed markets – only New Zealand has higher rates. Our sense is that the progress in the loss of "US exceptionalism" is tied to the underperformance of the Chinese economy and the manufacturing sector – Europe is heavily exposed to both. Although a revival in the manufacturing sector is likely to be required for a more forceful revival of theme, it is worth highlighting that US excess savings have been used much more aggressively that elsewhere (Figure 3), suggesting that any weakness in the US labor market is likely to cause a more aggressive slowdown in US growth than other markets.

Figure 3: Excess savings as a % of GDP

Source: Deutsche Bank FX Blog: Scarce excess savings, 6/27/23.