When you think about Jackson Hole and about the prospects for the beginning of Fed balance sheet normalization, don’t forget that there’s a reason why sentiment around the dollar has turned so sour over the course of the year.
Headed into 2017, “long USD” was one of the consensus, “no-brainer” trades. Hilariously, the excuse everyone would have given you back in late December for their rampant bullishness is the very same excuse they’ll give you now to explain why they’re overwhelmingly bearish: “dude, have you seen who’s President?”
At this juncture, it really doesn’t matter what Janet Yellen says or how quickly the Fed moves versus the ECB because we’re always just one errant tweet or one raucous campaign rally or one Mueller headline away from a constitutional crisis. That’s why the dollar has been a one-way ticket lower this year:
Throw in lackluster incoming inflation numbers and a persistent disconnect between “hard” and “soft” data and there’s simply no way the greenback can get off the mat.
This is of course ironic because back in April, Donald Trump explained dollar strength as a function of the world’s “confidence” in his presidency.
Here with some further color on this is David Finnerty…
Via David Finnerty for Bloomberg
The dollar needs some love, but politics are going to keep it starved of affection, even as Federal Reserve Chair Janet Yellen’s appearance Friday at Jackson Hole and the looming September Fed meeting have made some of my colleagues anticipate that central banks will reassert their preeminence.
- All investor eyes will initially be on Yellen’s speech for clues on monetary policy normalization, a key question for policy hawks and dollar bulls
- However, the topic of her speech is financial stability, so there’s a good chance market participants will be disappointed, leaving the dollar to languish at present levels
- Even if she continues to signal another rate hike this year, investors know that will be data dependent: inflation and wages need to rise before investors attach much credibility to talk of another rate increase
- With September around the corner, attention will quickly shift to the U.S. debt ceiling and though some investors may argue this is a non-event as the ceiling always seems to get raised eventually, President Trump’s comments this week on the matter indicate negotiations may be contentious
- Uncertainty is the last thing the dollar needs right now if it’s to stage a comeback
- USD/JPY dropped Tuesday as Trump threatened to bring the government to the brink of a shutdown as a way of pressuring Congress into funding the border wall; that, and the jump in T-bill rates show how nervous markets are
- And it’s not all about Trump, Democrats are unlikely to just roll over and sign a new ceiling bill without some concessions — and what they will demand is as yet unknown
- Given Republican infighting this year over replacing Obamacare, who knows what other agendas may surface to derail discussions, and then there’s the question of the impact the wrangling may have on tax reform plans
- And let’s not forget the ongoing Mueller investigation, which could resurface at any time to add to the turmoil in Washington and the greenback bear case
- Given this year’s political failures on Obamacare you can’t blame investors if they are in no hurry to embrace the dollar until the debt ceiling is actually raised: Seeing is believing after all