dollar Markets

King Dollar Faces Worst Policy Mix In Decades ‘Whoever Wins’ Election, One Bank Says

“It’s all about horseraces now”, Deutsche Bank’s George Saravelos declares, kicking off a lengthy FX strategy outlook with a line that accidentally conjures Fletch in my 80s mind (“It’s all ball bearings nowadays.”)

Although the dollar has found its footing over the past several sessions, there are clear long-term headwinds for the greenback, not least of which is the US fiscal/monetary policy conjuncture.

All summer, deeply negative real rates in the US served to undermine the dollar, while supporting risk appetite and rescuing the world from the acute conditions that prevailed in mid-March when a panicked dash for USD cash undercut nearly every asset class, including gold.

For Deutsche’s Saravelos, the dollar now faces “the worst policy mix since Bretton Woods”, and the outlook isn’t likely to improve regardless of the election outcome.

“The real rate differential between the US and the rest of the world is at the lower end of its post-2008 range [and] this is historically associated with persistent dollar weakness”, Saravelos writes.

He reiterates that the US is now running the largest peacetime deficit ever, and when you throw in the current account deficit, you end up “the worst twin deficit on record too… an important dollar negative”.

When it comes to November, Saravelos says a blue wave would be the most detrimental for the greenback “because it would lead to the largest fiscal stimulus, focused on lower-income households [which] would widen the current account deficit via higher consumer spending, and would discourage US portfolio inflows due to higher taxation on capital”.

Don’t let the “focused on lower-income households” bit be lost on you. Although Saravelos’s take is neutral from a political perspective, I’ve been keen to emphasize over the past several months that we’ve reached a point beyond which the only way to break the cycle of financial repression, asset price inflation (with little to show for it in the real economy), and ever expanding wealth gaps, is via a more redistributive tax regime and fiscal stimulus accommodated by the Fed.

In my view, risking inflation and the possible loss of some purchasing power is (more than) worth it. Otherwise, we’re doomed to persist in an inegalitarian spiral in perpetuity until there’s some manner of societal breaking point. We may already be there. (Again, that’s me editorializing, not a summary of any analyst’s opinion.)

Read more:

For The World’s Largest Economy: Two Possible Futures

What A Blue Wave Means For The Fed, According To Goldman

When it comes to the vaccine, Saravelos writes that “unless Moderna is the only vaccine to finish the race, most other candidates are likely to be broadly distributed globally”.

That’s obviously a good thing for humanity, but he argues it will be negative for the dollar as “COVID-sensitive equity sectors” which were left behind in the tech-centric summer rally will play catch up as global growth is upgraded. A pro-cyclical equity rally “should be negative for the dollar as a counter-cyclical asset, especially against EM”, Saravelos says.

Uncertainty is, of course, running high, but for Deutsche’s FX strategists, “a clear theme [is] emerging”. That theme is this: “The US policy mix is already very negative for the dollar and the most likely outcome” of the race for the White House, the race for a vaccine, and the race to keep economies open (which they call “the three horseraces”) “will be to make the mix even worse” for the greenback.


3 comments on “King Dollar Faces Worst Policy Mix In Decades ‘Whoever Wins’ Election, One Bank Says

  1. John Taylor says:

    I have noted several times in these spaces and write every day about the dollar’s multi-year decline ahead. This has been the way the US escapes from its overly expansive lousy productivity and its unwillingness to fix this up. I believe that the dollar is the only major policy lever that the US has and it will use it The dollar will collapse as soon as Trump goes home. We are talking about the dollar down in the 50% range against ‘strong’ currencies in the next few years. For those with no memory, it will be the FOURTH of these half-ings. 1971-1980 was first and then 1984-1995, followed by 2001- 2011. Look at a log chart to knock your socks off. The last high was at the end of Obama’s last month – he was the king and Trump the opposite. Our forecast for the Swiss is 0.5 and 60 for the dollar index in 5 years.

    This is worth more than paying attention. It is going to give the world fits. Heisenberg is the best. but you can see how little the dollar is covered as a critical variable. FX is in the shadows. I have worked in this dark, managed many billions over 40 years plus, and Bloomberg wrote that I was the best, winning every year but 3 out of 30. No crises, just mid teens return through 2011. I beat Soros in 1992 and was #8 in hedge fund earnings in 2008. The worse markets are the more you need FX expertise. The last 10 years have been quiet (equities up and dollar sideways) and my company, FX Concepts, once the bellwether of the industry has been broken up. We are busy again. And the global monetary system has angled its way into a box canyon with zombies, Ponzi’s and bad actors hanging around.

  2. John3D says:

    For the uninitiated FX has always seemed to be a game for the big boys: central banks, global corporations and large fund managers. How does the little guy dare sit at the table?

  3. John Taylor says:

    As a little guy, it is important to remember that the guys who are moving things are employees who put their pants on one leg at a time. They make lots of mistakes – especially because their goals are not making a profit like we little guys. The mice win a lot. For instance the trade now is obvious because we KNOW that the Fed and the ECB have almost no choices as Saravelos pointed out

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