The dollar jumped the most since March on Monday before eventually trimming gains.
The initial surge in the greenback was attributable in part to a mini-panic triggered by a mutated variant of COVID-19 spreading virtually unchecked in the UK.
Travel restrictions imposed by a laundry list of nations raised the specter of a food crisis in England, while still fraught Brexit talks added insult to injury for the pound, which plunged. Oil dove, triggering severe weakness in Norway’s krone, which dropped the most since June at one juncture.
If you’re in the sunshine camp (so to speak), just about the last thing you want to see when you survey the cross-asset landscape is a surging USD and a bull flattening UST curve. That’s almost always a sign of trouble. The VIX jumped the most in months before eventually calming down.
“The US Dollar sits at the epicenter of macro right now,” Nomura’s Charlie McElligott said. “Everybody’s ‘short’ it through various expressions, thus, higher USD is a ‘pain point’ for many consensual trades,” he added, noting that moves like that seen early Monday could prompt “sharp thematic trade reversals across the boards, as traders are forced to accelerate year-end de-grossing to protect PNL.”
McElligott also highlighted a Bloomberg piece from Sunday discussing Janet Yellen’s dollar dilemma as she prepares to elbow Steve Mnuchin out of Treasury.
The Trump administration pursued an implicit and often explicit policy of strategic easing and devaluation as the White House forcibly enlisted Jerome Powell and Mnuchin in the trade war. Trump often complained loudly about currency markets on Twitter and implored the Fed to engage in competitive easing. The prospect of Brad Setser overseeing the semiannual foreign-exchange report adds another wrinkle as traders ponder Yellen’s forthcoming tenure.
Anyway, a surging dollar is not a friendly development, and that was evident prior to the US cash open Monday. In addition, Nomura’s McElligott reiterated that the vaunted gamma “pin” lost some of its pull post-expiry.
“The massive amount of $Gamma set to run-off… open[ed] us up to larger moves on the way out, as previously ‘insulating’ Dealer ‘long gamma’ flows are sharply reduced,” he said.
While things did stabilize after markets took a step back to breathe, “mutant virus sweeps London” is not a headline that’s conducive to risk-on, that’s for sure.
London reported 11,577 new COVID cases for Sunday. The latest update on the UK government’s official COVID page showed a total of 35,928 new cases across England, Wales, Scotland, and Northern Ireland.
