Following last night’s bloodbath, you might be asking yourself if it’s time to call the bottom in the beleaguered dollar.
After all, how much more indeterminate can the fiscal outlook get? How much lower can Trump’s approval ratings actually go? And isn’t there a point beyond which stretched positioning is a contrarian indicator (that goes for both USD and TY)?
Those are all good questions, but if there were a dictionary entry for the phrase “just when you thought it couldn’t get any worse” Donald Trump’s Twitter profile picture would be next to it. Indeed, there’s an argument to be made that kicking the can on the debt ceiling actually muddles the outlook further, especially considering the fact that the whole thing will need to be revisited just ahead of the December Fed meeting.
Meanwhile, episodic flights to safety aren’t helping the rate differentials pillar, as bond buying drives down yields on benchmark U.S. debt.
Given all of that, and given the fact that “reality” currently looks like this…
…you’d be forgiven for being reluctant to call this the “bottom.”
Well, if you’re bearish and you needed a well-reasoned rationale for staying that way or alternatively, if you’re bullish and you needed to hear still more reasons why you should change your mind, consider the following excerpts from a great new Deutsche Bank piece aptly called “The Dollar Is In Trouble”…
First, the market continues to refuse to price additional rate hikes from the Fed, a phenomenon we have termed zombification. This is not about whether the FOMC will raise rates in December but a broader question of what will happen beyond. There are many important changes at play that suggest “zombification” is likely to continue. First, the majority of the FOMC will be different by Q1 of 2018 so that it is practically impossible to identify the future policy path given that the nominees will be decided by President Trump. Whoever is appointed, there may be a high bar for making big policy change in H1 of next year. Second, because Fed Funds are approaching neutral, the more the Fed hikes, the closer we approach the point at which the Fed will stop anyway. This perversely leads to rate hikes easing financial conditions because it makes it more likely that the Fed will then stop. It also makes the dollar asymetrically reactive to a dovish versus hawkish Fed. Additional rate hikes are only reluctantly priced but an official signal of a “pause” will be interpreted as a more permanent shift in policy. Recent inflation disappointments have merely served to accelerate this pre-existing trend.
Second, and for reasons running beyond the above, the FX market is undergoing a fundamental shift in drivers. It is no longer been driven by relative monetary policy expectations but an adjustment to flow imbalances that have built up through the implementation of highly unconventional global monetary policy. Part of this imbalance is a structural underweight in European assets which we have written about in the past. More broadly however, Americans are hugely underweight in their investment allocations to the rest of the world. The easiest way to demonstrate this is by looking at American buying of foreign assets.
Over the last few years Americans have liquidated close to the entirety of their foreign fixed income portfolio and are likely in the process of re-allocating back to the rest of the world. The shrinking in US-world relative growth differentials and ongoing political turmoil in the US may have helped catalyse this trend.
Deutsche Bank’s conclusion is simple: don’t fade the dollar weakness.
And frankly, it’s pretty hard to argue with that assessment. Especially considering that calling the bottom on Trump has so far been a fool’s errand…
- Just out: Trump Approval Rating at 36%; Disapproval 57% in Gallup Poll
“Dollar bloodbath?” Being a little dramatic aren’t we? Clearly, you’ve watched too much Trump propaganda. The dollar is down about 10% from the Trumphorian post-election highs, about 5% down from a year ago pre-election highs, but more than 10% above where it was in 2013-14. Context, context, context. When all of Trump’s black chickens come home to roost at the White House, then we’ll see some real dollar action. (http://www.marketwatch.com/investing/index/dxy/charts)
Every time we go through another melodramatic (your most hated political party’s name here) political pork distribution negotiation/gov. shut down “crisis”, the dollar loses value and then relatively quickly regains it after the “pork” has been distributed to the stronger party. What is this the fourth or fifth cycle debt ceiling crisis in the last 50 years?
Economically, beyond the gross waste of tax payer money, political corruption and theft of tax payer money (two people sit down and divide someone else’s money between – its theft), the genuine lack of political leadership competence and complete absence of ethics of the process – it has no real economic indication or significance for what the dollars worth (dollar value perceptions – like Bitcoin value perceptions are debatable) against other major currencies dealing with their own leadership issues.
When the dollar drops 20% in value call me, something of actual importance will be happening.
So, the hedge people were all in on a strong dollar at the beginning of the year, and all I do is put money into EuroPac funds and reap the rewards. Single malt to the moon is what i say.
Yeah, put all your money in Europe now as what could possibly go wrong with that?….especially at those Douche Bank fucks. Who never heard of a reaction really? LOL. Revisit this one year from now and again in two.