We’re gonna need more “covfefe”.
Donald Trump might have succeeded in jawboning the dollar lower on Thursday and Friday by first lambasting Jerome Powell on national television and then tweeting about currency “manipulators”, but on Monday, the dollar regained its footing after a weekend that saw Steve Mnuchin wandering around Buenos Aires trying to convince his global counterparts that the President isn’t trying to start a currency war.
“Steven Mnuchin’s job seems mostly to involve telling us when the President is tweeting or speaking in a personal capacity, and when he’s uttering policy”, SocGen’s Kit Juckes wrote on Monday morning.
Although the bounce looks to be fading a bit, the dollar did turn positive early Monday morning after an overnight session that saw the PBoC offer up 502 billion yuan in one-year MLF on the heels of a 189 billion injection earlier this month, with the latter designed to help cover maturities. That 502 billion figure is the largest ever.
The MLF operation is just the latest sign that China is fine tuning their approach to the kind of targeted easing that’s helping to widen the policy divergence with the U.S., keeping pressure on the yuan and helping to offset the effects of Trump’s tariffs.
Last Wednesday, reports suggested the Chinese central bank is all set to incentivize commercial banks to increase lending and investment in corporate bonds.
“The central bank has been making sure that lenders have ample liquidity by taking various measures, such as using its medium term loan facility, to support banks, especially those that have invested in bonds rated AA+ and below”, Reuters wrote. So basically, they are actively encouraging banks to buy high yield bonds.
That’s on the heels of the latest credit data out of China which showed that the deleveraging push is beginning to bite – hard. M2 grew just 8% YoY in June, the slowest pace in more than two decades. Analysts expect more RRR cuts this year and you can expect to see more of the type of targeted easing that manifested itself Monday in the record MLF op.
Meanwhile, Donald Trump is fighting an uphill battle to drive the dollar lower. Ironically, it’s his own fiscal stimulus policies that have juiced the domestic economy, helping to foster the U.S.-centric growth narrative that’s underpinning the greenback and forcing the Fed to lean hawkish to ward off inflation.
Trump is also at odds with specs and hedge funds who have added to dollar long bets for five consecutive weeks, taking the total net long USD position to the highest in over a year.