Presenting: An Indispensable Dollar Checklist

Ok, so the dollar is on pace for a truly terrible year…

…and hilariously, it hasn’t had a winning month since Donald Trump famously told WSJ that a stronger dollar is a sign of the world’s confidence in his leadership:

There have been all sorts of labored attempts to explain how this isn’t all Trump’s fault and because nothing is ever entirely attributable to a single factor, those efforts are not totally in vain.

That said, there is no question that the main driver of USD weakness has been jitters about whether Trump’s antics have deep-sixed his growth-friendly agenda, thus ensuring that the reflationary euphoria that followed his election was misplaced and raising questions about whether the policy divergence theme between the U.S. and Europe still makes sense.

Well, we might have hit bottom last week in terms of pessimism about the prospects for Trump’s fiscal policies. The dollar is up three days in a row, its longest winning streak in more than a month.

Below, find a useful summary of where things stand from Bloomberg’s Ye Xie…

Via Bloomberg

It’s easy to understand why the dollar has recovered this week. Consider the following catalysts for the recent dollar weakness:

• North Korea threat: Fading into background for now. Check.
• Debt Ceiling: Kicked down the road for 3 months. Check.
• Hurricanes: Worst has been avoided. Check.
• Dovish Fed: With STIR traders barely pricing in a rate hike through 2018, it seems fair to say the pessimism has reached an extreme. Check.
• Other central banks turning more hawkish: It’s not the case for the ECB, BoJ and Riksbank. While there’s risk BOE and BOC may hike rates, it’s hard not to argue that the prices have adjusted a long way. Half check.
• China currency regime shift: Yuan rally has been contained. Check.

So for now, you don’t have additional reasons to sell the dollar. Now that the talk of tax reform is heating up with Paul Ryan setting a new deadline for details, it’s worth covering at least some of the lopsided dollar shorts. For dollar bulls to regain the upper hand, you would need: A, the tax reform to make tangible progress, and/or B: Inflation data to revive Fed expectations. On the inflation front, it’s reasonable to suggest that the dollar may react more to a positive surprise in CPI tomorrow than to a negative surprise. Even if the CPI misses the estimate, it’s unlikely that the Fed will close the door on a December rate hike at the FOMC meeting next week. All told, the risk-reward calculation seems to be stacking slightly favorably to the dollar, at least for now.