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Today’s short note is all about FX, Trump, and vol.
Think back to September 2017. Back then, Trump still hadn’t figured out he had the power to administer unilateral tariffs on countries. The world was stuck on the idea that Trump’s power was actually limited by office.
But in a Kyle Bass interview with Raoul Pal on RealVision, Kyle wisely pointed out that Trump, under the Trade Act of 1974, had the power to unilaterally impose tariffs up to 15% at any time. Kyle joked that he was pretty sure Trump didn’t know that.
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Well, Trump figured it out. And since then, he has been running around calling himself “Tariff Man” and basically imposing tariffs on any country that strikes his fancy.
At first it didn’t seem so bad, but we have quickly learned it’s not that much fun.
After getting his way on trade, Trump has recently taken to bullying Jerome Powell – badgering the Fed chair into doing the administration’s bidding. By and large, the Fed has succumbed.
But there is one economic input that Trump has complained about, but hasn’t quite figured out how to fix (yet). That is the US dollar.
Although Trump has tweeted that it is not fair that the dollar rises, he has yet to realize that he has the authority to do something about it (he controls the Treasury). When he figures it out, there’s only one trade you want on the sheets and that is FX volatility.
Right now, the JPMorgan FX Volatility Index is sitting near all-time lows. FX vol is dirt cheap.
(Bloomberg)
Regardless of your views of the US dollar, buying gamma in FX-land is probably the best long vol. position out there right now.
“In the last couple of decades, there have been only three times in which the JPMorgan Global FX Volatility Index fell below a value around 7.
Every single time, the dollar strengthened 10% or more soon after.”
How does this sync with Trump’s wanting the dollar weaker???