If you frequent these pages, you know the dollar story all too well by now.
Following Trump’s election, the greenback’s correlation to rates and stocks formed what I’ve called the “reflation trinity.” Through the end of December, the Trump trade persisted. Dollar up. Rates up. Stocks up. Although we might fairly say this trade “peaked” mid month.
Going into 2017, long USD was the consensus trade.
(BofAML)
But things have come apart lately. Despite the fact that most analysts are clinging to the “structurally strong USD” thesis, the Trump juggernaut roles on. Verbal intervention from the new President and his economic spirit animal Peter Navarro is all that apparently matters. As I noted earlier this week, Wall Street is struggling to come to terms with this new reality (see “‘Caution Now Warranted’: One Bank Rethinks The Long Dollar Trade“).
Below, find some new commentary on the greenback from FX trader turned Bloomberg contributor Mark Cudmore, who thinks “the dollar trade is psychologically broken.”
Via Bloomberg’s Mark Cudmore
After almost three months, the mentality around the dollar trade seems to have evolved. This may provide some tactical support but makes a retest of the highs unlikely. The irrational stubbornness of dollar bulls is finally breaking. Yesterday was the first time that dollar appreciation caused the market to question rather than cheer
- The dollar finished 2016 on a high based on Trumpflation hopes and fell this year on Trump-centred risk-aversion due to the new administration’s actions. What’s happening now is that markets are – at last – turning their attention elsewhere
- Investors have tired of Trump tweets and taken a look beyond U.S. borders. And what they’ve seen in Europe, and particularly France, is worrying them. The center of risk- aversion, and the topic of risk meetings, is now European politics
- This has helped the dollar trade like a haven currency again. The flip-side is that the greenback won’t necessarily rally in a positive risk environment
- The majority have not given up on dollar strength, but at least there is some capitulation in sentiment. This makes the dollar less vulnerable in the short-term, but also means the market will be less inclined to chase it higher on rallies
- Technically, the dollar has broken down. Fundamentally, it’s getting little policy support and previous tunnel-vision analysis is being revised. Treasury yields look like they’re trying to break down as well
- All this has finally registered with investors. Rational analysis and two-way trading can resume. Give the dollar at least a couple of months to recuperate before it can potentially become the market’s great hope again
