Listen, here’s the thing: judging by my inbox, there are at least four readers who did not appreciate my three-word explanation for why the dollar is in the doldrums.
Here’s that explanation, as presented in Friday’s “The Week In Charts” post:
Too much treason.
Besides being hilarious, that is in fact the reason for this:
“Long USD” was supposed to be one of 2017’s “no brainer” trades.
That call rested on the rather dubious assumption that Donald Trump would be able to swiftly implement his growth-friendly agenda. As it turns out, being a complete government neophyte and committing treason turned out to be a bad combination when it comes to getting things done on Capitol Hill (who knew, right?)
The other thing you have to understand is that paralysis in Washington is casting serious doubt on the extent to which fiscal policy is prepared to take the baton from monetary policy and that, in turn, is weighing heavily on yields. This undercuts the rate differentials pillar for the greenback as it’s no longer clear that the policy divergence theme (Fed versus ECB/BoJ) will play out like everyone thought it would play out. Here’s Barclays:
Domestic political uncertainty has increased in the past weeks with the stalling of the healthcare reform, the broadening of the Russia investigation, a shake-up of Trump’s legal and communications teams, and open criticisms of the Attorney General. The uncertainty has weighed on the USD as the administration spends time and resources that could have been used pushing for tax reform. The prospects of a meaningful fiscal boost look slim, as the policy agenda is crowded with budget discussions, debt ceiling and NAFTA renegotiations.
So yeah: sorry, but “too much treason” is about the most accurate way to describe this situation.
And that brings us directly to yet another takeaway from this week’s CFTC report: net shorts in USD have now hit their highest level since February 2013. So, the most net short since the Fed was still engaged in QE3.
Here’s the more granular (and more colorful) breakdown from Goldman:
Ironically then, the rationale for why USD was a “no-brainer” long going into the new year is now the rationale for why USD is apparently a “no-brainer” short: Donald Trump.