U.S. 2nd Quarter GDP came in this morning better than the street expected and underlined the fact that the U.S. economy was temporarily derailed by an intense winter across the country.

Image courtesy Arnaud Joron: http://www.photoxpress.com/search-stock-photos-photographer/ARNAUD+JORON/275548GDP came in at 4.0% versus 3% expectations as Gross domestic purchases came in 4.5% vs -0.4 prior. At this point the first half growth story in the U.S. is trending where it was supposed to with a rate of roughly 2.1%.

Exports and Inventories, the two places of extreme weakness last quarter revered field. Add these numbers to the current trajectory of 3Q and the expectation of 4Q and you have a full picture that is much more emphatic on a few themes that the Fed must address and may be doing so right now as they wrap up their meeting.

Ultimately all this sets the stage for U.S. Dollar Bulls. Rates are too low and the U.S. macro differentials to the G3 are alarming. While the size of the Fed balance sheet is the reason the Euro has held in (while they actually shrink theirs) ultimately it is about relative contraction that will take place in the U.S. and it will be huge.  

We think this is an important theme. There are pluses and minuses. Pro cyclical growth which will help miners, industrial metals, and even shippers.

The negative is for multinationals who may benefit from the growth but also will see a currency headwind to their overseas efforts. Recently multinationals have been outperformers in earnings season on the strength of their growth economies exposure and also the weakness of the U.S. Dollar as they repatriate their foreign earnings (those who do!).

For now the trade is to be adding to the DXY which you can do via ETFs such the Power Shares DB US Dollar Index (UUP, quote) that replicate the up or down movements of the U.S. Dollar Basket. We also believe that rates while range bound are too low and will recalibrate on these macro releases to the 2.75-2.85% area on the 10yr.

DXY July 30 2014 1046




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