As we noted earlier, the dollar is dumping this morning:
But while it is trading poorly, the dollar most certainly has yet to break down in any definitive manner, holding at its ECB-range lows for now…
As former fund manager and FX trader Richard Breslow points out, the most you can say is it currently sits near the bottom of a range that has trapped it for several months.
The way markets are trading the last several days and the revised projections for where the currency is going that are being issued left and right, you would think it has already imploded. It certainly could, yet if there is one lesson traders seem unable to learn is that this has been a very tough environment to count your profits before they actually materialize.
If anything, the members of the FOMC are getting more united behind continuing the steady and gradual pattern of rate hikes. Yet, somehow, people want to believe that other central banks will out-hawk them. That is patently absurd. Was there anything you heard out of the ECB or BOJ to suggest we should be expecting thunder and lightening?
Even when the Norges Bank hiked today, it was accompanied with dovish forward guidance. Unlucky for all those out there who were positioning for them to be just getting started. And the SNB sure didn’t change its tune when it pointed out that the franc remains highly valued and that while the Swiss economy is doing well “at the moment”, they expect growth to slow in the second half of the year.
Tariffs and trade restrictions are properly assumed to be threats to the global economy. But the key word here is global. The assumption that the dollar will take the hit if things get worse is emotion speaking, not analysis. Those thinking the FOMC might use trade as a reason to slow down or stop haven’t looked at the relative strength of the economic numbers being posted. Oddly enough, those calling for the dollar to fall hard seem to believe it goes down under any tariff scenario. If so, it doesn’t belong in the calculus.
We spend an awful lot of time debating where the U.S. neutral rate lies and whether that will be a line-in-the-sand barrier to hikes above it. Dollar traders aren’t focusing on what short-end fixed income investors are clearly zoned in on. Which is that we’re beginning to see more and more research suggesting the neutral rate may be higher than previously surmised.
And more than a few comments from the latest Fed conference in Boston were that rates may need to be allowed to rise above it for a period of time. Since then the two-year Treasury yield is up 17 basis points. Compare that to bunds where comparable yields are about 5 basis points less negative. Yet the euro is higher by a big figure and people are more bullish.
Emerging markets are trying to stage a rally. Considering how far they have fallen, you could say they are entitled. It’s important to see if they can sustain any sort of rally. Maybe they have found a bottom, but that’s a big assumption to make. All you can conclude if you are trying the long side is you know where your stop should be.
Be long or be short, as you see fit. But make sure you have a reason for it beyond liking or not liking the players involved.