It’s doubtful that Donald Trump will be able to focus on anything other than the impeachment probe this week, but on the off chance he gets around to looking at the dollar, he won’t be happy.
The greenback is perched at a more than two-year high amid souring data abroad, another rate cut from Australia (with hints of more) and Fed officials persisting in an upbeat assessment of the domestic economy.
The RBA of course cut rates 25 basis points to a record-low 0.75% on Tuesday, as expected. While there’s a rationale for this both in terms of domestic economic priorities and certainly in the context of the global economic slowdown, the simplest take is just that the “race to the bottom” is on. It’s competitive easing, as everyone rushes to offset everyone else’s rate cuts, lest their currency should experience unwanted appreciation.
The Aussie is now at its lowest in nearly a month. Short-term names anticipating hawkish forward guidance from the RBA were disappointed and got stopped out, apparently. Philip Lowe said the bank “will continue to monitor developments, including in the labor market, and is prepared to ease monetary policy further if needed”.
The kiwi dove too, falling to a four-year nadir.
As a reminder, Lowe and his deputy reckon the lower bound in Australia is somewhere in the neighborhood of 0.25%-0.5%. We’re one rate cut away from the top end of that “range” (which isn’t really a “range” considering it comprises just one quarter-point cut). After that, it would theoretically be time for the RBA to get “creative”.
Meanwhile, the Chicago Fed’s Charles Evans described the US economy as “solid” in remarks delivered in Frankfurt. “The incoming data suggest this vitality should carry forward in the near term, reflecting healthy household balance sheets, elevated consumer confidence and, most notably, a vibrant labor market”, he said, adding that “most of the concerns over growth are about potential risks that could be costly, but also may never occur”.
Suffice to say that doesn’t exactly scream “aggressive rate cuts”.
And so, the dollar sits at a near 29-month high (BBDXY at a two-year high). As for the Fed’s trade-weighed greenback (which Trump loves to cite when tweeting about the “record” strong dollar), it’s… well, strong.
Note that any further backup in yields catalyzed by the global knock-on from the turmoil in Japan risks exacerbating the situation.
“Although most likely just a local/tactical dynamic, as this bear-steepening reversal is yet again a function of crowded positioning in rates [it] poses a ‘knock-on’ risk across assets”, Nomura’s Charlie McElligott wrote Tuesday, flagging the breakout in DXY to near 2.5-year highs.
Later, the Fed’s Evans acknowledged the dynamics discussed at length in these pages of late. “A strong dollar, everything else equal, usually puts downward pressure on the inflation rate, and that’s something to be taken account of”, he told reporters in Frankfurt. “We are looking at how that affects import prices and how that hits the inflation measures”, he added.
As a reminder, Deutsche Bank has repeatedly suggested that in the absence of aggressive Fed cuts, or some kind of meaningful inflection in the global economy that “corrects” the economic divergence between the US and the rest of the world, the US risks importing disinflation.
That’s one argument for why, recession or no recession, the Fed will have no choice but to keep cutting.