As Currency War Beckons, Here Is One Trader’s Dollar Mea Culpa

Poor Mark Cudmore.

A few hours ahead of Wednesday’s decidedly dovish Fed statement, the former trader made a rather bold call. Specifically, he said this:

The Fed’s poised to ignite a violent dollar rally.

And in case that wasn’t clear enough, he elaborated as follows:

Dollar risks are starting to seem skewed all one way: toward an immediate rally.

Several hours later, this is what happened:


That was of course the result of a Fed that not only came across as cautious on the outlook for inflation, but also a committee that appeared to give themselves an “out” on September balance sheet normalization.

The greenback managed to rebound a bit on Thursday…


…but generally speaking, things aren’t looking great…


This has of course been accompanied by all kinds of euro strength and when you throw in the rally in metals, commodity currencies are underpinned as well. Taken together, this sets the stage for what could conceivably morph into a currency war. We talked about this at length earlier and for those interested, you can review the posts here:

Simply put, everyone is trying to normalize, but no one wants to see their currencies soar. As Richard Breslow wrote earlier today, “it’s certainly been a home-run trade this year to be short dollars but don’t expect the ECB to respond to a hesitant Fed by becoming more aggressive in their tapering rhetoric.”

Meanwhile, EURCHF has breached 1.12 for the first time since the SNB abandoned the floor.


As we put it bright and early Thursday morning, “needless to say, that means it’s attractive as a funding currency.”

That adds another layer of complexity to the whole thing because now you’re talking about having to consider what that means for the other side of that trade. Here’s Bloomberg’s “other” Mark – Mark Cranfield:

It’s not often that Asian traders need to watch EUR/CHF but that may change on Friday. The cross surged through multiple option triggers on Thursday taking it into the upper half of the trading range from the mother of all currency implosions in January 2015. If the Swissie is back in play as a funding currency, there are a few Asian candidates that traders will be eyeing for carry trades including CNH, AUD and NZD.

As a reminder, here’s what the YTD performance picture looks like for AUD, CNH, and NZD:


Again, fun stuff.

So it’s against that backdrop that we present Cudmore’s humble mea culpa on the spectacularly bad dollar call mentioned here at the outset:

A number of readers have contacted me in the last 24 hours to discuss the idea of whether this week marks the capitulation point for the dollar. It’s certainly a tempting idea given the price-action but, in the wake of my incorrect dollar call from Wednesday, I refrained from joining the debate with conviction.

Friday’s close will be key for short-term dollar sentiment but the larger story is that, with the FOMC out of the way, there’s little to derail global risk assets and yield collection ahead of Jackson Hold next month. That means that any dollar rally is likely to be short-lived, even if briefly powerful, as investors use spikes as an opportunity to releverage into higher-yielding EM assets.


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