When USD/JPY was trading close to 101 on election night, who could ever have thought that it would be trading at 109 less than a week later? OK, put your hand down Pinocchio, I see you. Anyone else? Bueller? Bueller?
The strength of the dollar in the wake of the election has been remarkable and, on the face of it given the results of the pre-electoral poll, rather surprising. Yet one need not dig too deep beyond the facile justification of interest rate differentials to unearth a real thematic rationale for current and future dollar strength.
While Macro Man has spent relatively little time in discussing the dollar since the election, the potential implications of a Trump presidency are fairly straightforward- certainly more so than in equity space.
Simply put, changing the trajectory of the policy mix in the United States towards looser fiscal and tighter monetary policy is a classic recipe- no, THE classic recipe- for an appreciating currency. Frankly, it's been so long since either looser fiscal policy or tighter monetary policy- let alone both- has been in vogue anywhere that it's easy to forget what it means for currency markets.
It seems clear, however, that punters have not. Price action over the last week has unfolded in a classic style consistent with a market engaged with a theme, making money in it, but not yet fully positioned. The appreciation against the euro and yen has been relentless, with virtually no pullbacks. If you're not in it already, the market's giving few opportunities for an attractive entry.
What's really scary (or thrilling if you're a punter) is that on a more strategic basis the set-up is eye-wateringly good for gains of another 15-20%. The monthly chart of the DXY (i.e., the euro with a prom dress on) has shown a classic period of consolidation after the rapid advance of 2014-15. You don't have to squint too hard to see three waves there. The dollar is now at the very top of the range; probably not the greatest place to establish a long, but man, if we get a monthly close above 100.50 or so there is almost nothing but fresh air until 120.
This, not coincidentally, would be completely consistent with an upswing in US nominal GDP nd interest rates while the ECB and BOJ remain in NIRP/balance sheet expansion mode.
How long it could persist before starting to bite, thereby provoking a reaction from either monetary policy or the White House/Treasury Department is another question, particularly given the latter's apparent predilection for pointing the finger at perceived currency piss-takers.
But that will be another story for another year. For now, the dollar is making 'em holler with joy, not with pain. (Though Yellen might beg to differ!)
The strength of the dollar in the wake of the election has been remarkable and, on the face of it given the results of the pre-electoral poll, rather surprising. Yet one need not dig too deep beyond the facile justification of interest rate differentials to unearth a real thematic rationale for current and future dollar strength.
While Macro Man has spent relatively little time in discussing the dollar since the election, the potential implications of a Trump presidency are fairly straightforward- certainly more so than in equity space.
Simply put, changing the trajectory of the policy mix in the United States towards looser fiscal and tighter monetary policy is a classic recipe- no, THE classic recipe- for an appreciating currency. Frankly, it's been so long since either looser fiscal policy or tighter monetary policy- let alone both- has been in vogue anywhere that it's easy to forget what it means for currency markets.
It seems clear, however, that punters have not. Price action over the last week has unfolded in a classic style consistent with a market engaged with a theme, making money in it, but not yet fully positioned. The appreciation against the euro and yen has been relentless, with virtually no pullbacks. If you're not in it already, the market's giving few opportunities for an attractive entry.
What's really scary (or thrilling if you're a punter) is that on a more strategic basis the set-up is eye-wateringly good for gains of another 15-20%. The monthly chart of the DXY (i.e., the euro with a prom dress on) has shown a classic period of consolidation after the rapid advance of 2014-15. You don't have to squint too hard to see three waves there. The dollar is now at the very top of the range; probably not the greatest place to establish a long, but man, if we get a monthly close above 100.50 or so there is almost nothing but fresh air until 120.
This, not coincidentally, would be completely consistent with an upswing in US nominal GDP nd interest rates while the ECB and BOJ remain in NIRP/balance sheet expansion mode.
How long it could persist before starting to bite, thereby provoking a reaction from either monetary policy or the White House/Treasury Department is another question, particularly given the latter's apparent predilection for pointing the finger at perceived currency piss-takers.
But that will be another story for another year. For now, the dollar is making 'em holler with joy, not with pain. (Though Yellen might beg to differ!)
39 comments
Click here for commentsDollar holler indeed. The weight of the basket distributed as it is makes it vunerable to breaking the round number UNLESS ; the EU avoids a political debacle ( place your own odds) ; and the BOJ et al adopt a similar policy change (could happen but what probability).
ReplyAs much as I hear the calls from prior bears that US equity could benefit from this scenario I have to say for me the issue will be one of winners and losers. Dollar strength as not been correlated for a long time with big blue outperformance because of the foreign earning and BS issue for revenues. You've really got to seriously grow if you're going to offset 15% and more currency appreciation. Domestic companies though stand to gain through cheaper input costs on basics and I would have thought domestic consumption would do relatively well as that dollar buys so much more effectively increasing disposable income. Overseas reverse those issues.
By the way 1968 was a great year !. I attribute my flowing grey locks to the fact that the roots were significantly pollinated by all the flowers in my hair ! Although San Francisco was more like Lincolnshire if I recall correctly. As an experience it loses something in the translation.
ReplyIn the spirit of 1968:
ReplyHey Jude, don't make it bad
Take a sad song and make it better
Remember to let her into your heart
Then you can start to make it better
About the dollar strength - all fine and dandy (long time readers know this punter won't shed any tears if DXY decides to don a spacesuit), except the last time it went to 120 emerging markets were bed wetting toddlers at most, and crude was a much bigger part of folks consumption baskets than their investment portfolios. As for the benefit to the US economy, the problem as I have repeated ad hominem, is that we would be starting the expansion late cycle with unemployment at 4.9%, so there may be a bit more water in that soup than cheese.
All that said, before we start comparing this clown to Deng Xiao Peng, just understand the complexity of getting anything done in the US in this day and age, congressional majority or not - the fact that he doesn't even know what he wants yet delays the timeline even further. But hope is a wonderful thing.
Minor details I'm sure.
USD highest since 2003. Equity & Commodity reaction pending.
ReplyUnfortunately Washed If you wait for the detail and certainty you will be in the position of buying from a market that as already priced it in. In this I find the markets and Chess very similar in that you're always having to play several moves in front rather than in terms of what just happened.
Reply112.5 target.
ReplySincerely,
Mastro Geppetto ;}
checkmate, you are correct, equities are thier own beast and move on expectations more than reality.
ReplyMM, if the DXY goes to 120, might our friends in China be screwed and decide to do another deval? Sure the Europeans and Japanese love a stronger dollar (though they may not admit it) but not sure Asia would, especially with higher rates at this point in the cycle. Perhaps only if it was accompanied by a rising current account deficit in which rising asian exports could be sold into. But with Trump that probably wont be the case.
now you can argue that the USD funding issue is probably well cleared since the tapering in 2013 but I still think that a higher USD probably causes problems somewhere to someone that eventually come back to roost
https://www.linkedin.com/pulse/reflections-trump-presidency-one-week-after-election-ray-dalio
Replywe think that there's a significant likelihood that we have made the 30-year top in bond prices. We probably have made both the secular low in inflation and the secular low in bond yields relative to inflation. When reversals of major moves (like a 30-year bull market) happen, there are many market participants who have skewed their positions (often not knowingly) to be stung and shaken out of them by the move, making the move self-reinforcing until they are shaken out. For example, in this case, many investors have reached for yield with the upward price moves as winds to their backs, many have dynamically hedged the changes in their duration, etc. They all are being hurt and will become weaker holders or sellers. Because the effective durations of bonds have lengthened, price movements will be big. Also, it’s likely that the Fed (and possibly other central banks) will increasingly tighten and that fiscal and monetary policy will come into conflict down the road. Relatively stronger US growth and relative tightening of US policy versus the rest of world is dollar-bullish. All this, plus fiscal stimulus that will translate to additional economic growth, corporate tax changes, and less regulation will on the margin be good for profitability and stocks, though for domestically oriented stocks more than multinationals, etc. The question will be when will this move short-circuit itself—i.e., when will the rise in nominal (and, more importantly, real) bond yields and risk premiums start hurting other asset prices. That will depend on a number of things, most importantly how the rise in inflation and growth will be accommodated, that we don’t want to delve into now as that would take us off track.
LB is in total agreement with the longer term $ thesis here, not so much b/c of US fiscal policy (we look at Mitch McConnell and Paul Ryan and we do not see a dynamic forward-thinking government), but b/c of the continuing struggles of a currency that makes up about half of the basket against which DX is measured. So, DX 120 is on the cards, but not b/c of US growth.
ReplyJust now LB thinks we are carving out a short term dollar (and rates) top here, and that we are due for a pullback in Bucky, now that everyone is finally in love and on board with the greenback. We might even get very bold and get long EURUSD or even slightly yennish for a trade, although we expect 110 to be tagged first. Pretty soon Mrs Watanabe will get "massively" long USD and there will be nobody left to get short JPY.
Death of Bonds articles everywhere… this kind of tosh. Where were all these sages in midsummer when we were all running scared of fixed income and everyone was piling in? Generally when the media discovers overvaluation, it has corrected.
http://www.marketwatch.com/story/there-are-three-possible-outcomes-for-bonds-and-two-are-bad-2016-11-15
There are several indications that selling momentum has eased and will exhaust itself soon, but LB will keep an eye on the relative trading volume on up/down days for a week or so here as we start to tiptoe into US fixed income longs. Today we are donning Kevlar gloves and wading into the swamp in a limited way to see what we can drag up off the bottom in terms of munis, preferreds and the long bond. Our model is that this is a tradable retracement of 50-61.8% of the post-election dump.
Sorry to be so dismal, but after all, it's who we are. We continue to believe that the US is going to grow at most 2-2.5% p.a. for a while, in part b/c whatever Trump and the GOP decide to cook up, Europe and China continue to export deflation. Secular stagnation here reminds us here of the reported death of Mark Twain, in that rumors of its demise have been greatly exaggerated.
Whether the bond bull market is finally dead is a really interesting question, on which we remain agnostic. Many reasonable thinkers remain convinced that a dollar rally with low global growth can drive US rates lower than even the 2016 lows, and that a 1% 10y is out there in the future somewhere. Remember that restrictive labor and immigration policies were a major feature of Trump's campaign, and that's a Japanese recipe…..
@Left - to your point, there is only one thing that Trump and the house and senate republicans currently agree on, which is the partial or full repeal of obamacare - everything else is TBD after they can figure out how to differentiate their orifices from holes in the, um, wall. McConnell didn't even sound enthused with the infrastructure spend idea.
Reply@checkmate Im confused by your statement - this market (equities anyway) seem to be under the impression that Trump's stimuli will be in place by say Christmas. My whole point is that the market is pricing in absolute certainty.
@LB, IP came in flat, so if there is a relief rally in bonds you would expect it today.
Reply@washedup, with Boehner already on board with 'it's not a stimulus!' and the past popularity of Saint Ronnie's deficit spending looming large in memories, pricing in infrastructure spend seems reasonable.
Washup, while I agree with your specific point, there is a lot house and Senate pub agree on. Obamacare is tricky as all agree you cannot just repeal and turn back clock. I think Dodd-Frank is something they agree on and more important to growth. Also, pipeline like Keystone will now be built, so a lot of private sector infrastructure gets done.
ReplyAs to bonds, there is a limit to how high rates can go before throwing US in recession. It may not be 2.2%, but I do not see 6% as Gundlach has forecast. Really, I do not see 4%, but I am nearsighted.
@flowthrough (and with all due respect to LB who is the resident bong guru), given how crowded and entrenched positioning in bonds is, people may be surprised at how much we can move in a very short period of time. Don't even see 4%? Beware of recency bias - I see the situation in long bonds as analogous to oil in late summer 08. I rode the tilt short from 138-130 and I am really hoping to be able to sell 130 again coming from a 50% retrace.
ReplyAs for the stimulus, my point is a simple one - not saying it won't happen - just very skeptical it will happen without a sense of urgency, which tends to not appear till people are running around with their hair on fire. How is this different from 2000-2002 when Bush passed the tax cuts? He had all three branches of govt and unlike trump actually got along with everyone. Still took a recession, bloodbath in equities, and 9/11 to get it done.
"with all due respect to LB who is the resident bong guru"
ReplyNot only does LB command respect for fixed income analysis (Abee is the real high yield pro here, btw) but now he also has additional expertise in the "bong" arena. Indeed, we do think that a lot of reflationists have been taking extra bong hits.
For me it's about timeframe and people's differing timeframes can often lead to misunderstanding. I could easily envisage currency and bond markets getting into what I would term to be consolidation mode anywhere here. Others, maybe LB would call it a tradeable correction. In terms of events that gives the market the time to consider exactly what a Trump term of office will look like and define a trend which in policy terms will with hindsight show the end of the bond bull market and a more inflationary environment. The latter of course is no done deal simply one potential outcome. However, it is an outcome currently foreseen by people like Gundlach and Dallio both of whom I respect as macro economic thinkers.
ReplyHahaha LB - yes - was it you who recommended everyone switch to indica from sativa? I believe that was the start of the sideways phase in global equities!
ReplyIt is absolutely astounding to me that if this bond market move lower/USD spike higher had happened even 1 month ago, we would be talking about an absolute mayhem in equities. And yet, for some unknown reason, market participants have managed to convince themselves, over the course of the past week, that Trump and his policies would fuel the next massive bull market -- on whatever timeframe anyone bullish has in mind. What happens when they run out of ganja? And what happens when people realize that you can't (fiscal) stimulate a dead horse of an old industry -- this isn't the 1980s after all, but 2016. Tech and innovation are the way to go for the U.S. -- you hurt those, and all you're going to get is a whole bunch of staglation in the U.S., with a few monetary policy errors along the way, for good measure...
ReplyThe "old industries" ( agrigulture, steel, autos,energy etc) are still critical for human civilizations - we dont live on "bits" alone. Due to computers, automation and robots the productivity in these industries is rising fast - or , on the flip side, labor costs are less important, so globalization loses appeal other than for tax and regulatory arbitrage. It is not a coincidence that corporate taxes, repatriation of offshored capital and massive reduction in regulations are key elements of Trumponomics. Moreover, there is a huge associated growth in services when you bring in an "old industry" plant back - so there is a multiplier effect.
ReplyTech and innovation cant work in a vaccuum. People still live in a world of "atoms".
3D printed clothing is already on the market. So why do we want to locate the printers in Vietnam? No need. print them here - close to the consumers.
ReplyThis new industrial renaissance - will probably play out over decades , with some items taking longer to set up than others. Perfect timing for the Millenial cohort getting into their 30s - and this cohort is nearly the size of the Boomers.
ReplySo, we have the least experienced President in history, who lost the popular vote against a very weak candidate, and people think it's morning in America? Why wouldn't a long-term capital allocator see through the next four years to the administration likely to follow in 2020. Namely, some Sanders-esque lefty who is going to hike taxes and grow government spending/GDP significantly. I'd like to think the American middle class realizes that such a government won't create the kind of jobs they want, but it seems plausible they'd give it a try if Trump fails. My modal forecast is stagflation, likely under Trump too.
ReplyOne thing stocks really have going for them now is the overseas cash repatriation. There are going to be better trades than shorting equities.
Trying to pick a near-term bottom in the yen today. We'll see. Probably a fool's errand. Short EURCHF still seems clearest trade to me.
Is this a contrarian signal ?
Reply"Blogger Macro Man , among others, says the dollar index could shoot 15% to 20% higher."
http://www.marketwatch.com/story/the-stock-rally-is-about-to-catch-a-chill-if-this-indicator-holds-2016-11-16?siteid=bigcharts&dist=bigcharts
I recall years ago reading a book about this guy who worked in a circus or some such. He made a killing in stocks whilst he was out of the US juggling bears or something. In other words he made a lot of money when he was away from the market ,away from the noise, and didn't micro manage his portfolio when the tape and the media got inside his head.
ReplyNot sure why I remembered that today other than I was thinking all this Internet shite certainly makes one think that if noise was shite then the world as a major case of diarreah .
The context for that MM was the ability of some faceless nonentity quoting an abbreviated sentence from your blog without any of the accompanying nuances that made it useful.
If tax holiday comes for the likes of AAPL etc, wouldn't they use it primarily to repay the debt they took on to finance the current buybacks? I don't think investors would like a negative-net-cash AAPL all that much.
ReplyMr. T, why in the world would AAPL buy back the debt when the coupon is a fraction of the company's return on capital/equity/assets as well as the earnings yield, plus the payments are tax deductible? Cannot see it...more likely HIA2 will simply be used to fund the next round of buybacks/divvys while the business continues to throw off cash, if not growth.
ReplyI think that all the hopes attaching to the Trump presidency should fade somehow: given that media is ever louder on painting Trump transition as incompetent and slow; given that Rub house and senate do not mention any public money for infrastructure; given that they plan to cut entitlement as well when they formulate tax and regulation cuts. All those excitements depend on vague hopes that Trump presidency is going to have all those fabulous benefits but no such risks as trade wars, firing Yellon, or mass deportations. I am not saying that any of these risk events would happen, but it seems that the market does not put any risk premium of those events in the asset prices.
ReplyI think that we should remind ourselves that Trump presidency is still very uncertain. Be careful when the expectation goes extreme.
Which begs the question - if AAPL stock is 20% off the highs with massive buybacks, exploding samsung phones, and equities close to records. where would it go without?
ReplyIf I ever saw an over-owned piece of paper...
Jamie Dimon rumored to be named at Treasury
ReplyOh how nice - who better to look out for the interests of the working class than Pierpoint Percival Dimon. I guess we will be bailing out banks then. Not that they will be needing one - things are going so swimmingly well.
ReplyTax holiday on current cash abroad as lon as it is invested in some form of infrastructure bond or new jobs. 15% corp from there on in for anyone who avails. Should work fine
ReplyOil Options Traders Buy Record Bullish Contracts Amid OPEC Talks
Replyhttps://twitter.com/jessefelder/status/798987125010014208
These guys will loose their shirts.
Treasury Sec is a very technical job. You cant put an Iowa potato farmer in that job - just to show that you care. So , Jamie Dimon would be a fine choice. Also - a decent, honorable person can behave differently depending on what position he occupies - No? If you are private businessman - you go all out to make money within the boundaries of the law - and that is good and fine . Same person - in a Treas Sec position works for the nation - and does the right thing - and cracks the whip etc. This is not contradictory and smart, honorable people can make the switch.
ReplyI am pleased that DJT is not literally "draining the swamp". Historically, dismantling institutions in a radical way does not lead to good outcomes. As an extreme example look at what we did in Iraq. probably the worst mistake of that entire sordid affair was to gut all institutions including the regular army. Did'nt work out too well.
ReplyI think he s doing the right thing - use many insiders , but set a new tone. And implement those anti-corruption measures.
Oh and , Dimon is not a descendant of the Rothschilds!!He is a descendant of Greek immigrants who changed the family name from Papademetriou to Dimon to make it sound more French.
ReplyIn French it would be pronounced Demon, right?! :)
ReplyApparently Dimon has turned down the offer: "Dimon feels he’s not suited to serving as the nation’s top ranking economic official, according to sources familiar with the situation. It may be that he had reckoned that serving in the Administration would require curbing the blunt, outspoken style that has served him so well in the financial world. J.P. Morgan shareholders will be relieved; the bank’s shares dropped 2.5% on the rumor."
ReplyI hear John Stumpf is available...
ReplyThey're going to need one hell of bond salesman, and strike while the dollar is rising.
ReplyAfter nine years running, it's safe to say the trillion dollar deficit is structural, and you've got two branches of government - three if you count the fed - intent on blowing it out further. bid from global trade/exorbitant privilege is pale figure of what it was, esp with chinese capital flight, oil producers are liquidating what they own, and multi-year risk parity party is over. leaves just boj, for a piece of it. :)
@ washed, AAPL's stock is so damned cheap it doesnt make sense. If it werent this big its PE would be at least double. Thats the problem with a short equity thesis here, there still are some cheap stocks out there, even if the market is expensive.
Reply@LB, I wish I were a HY expert. Here's my current thought there - is there enough simple quant portfolio allocators out there to hit the bid on the HY ETF's? I mean the chart looks bad if you just look at price, but spread wise, and vs SPX and VIX, its gotta be attractive. I'm watching CCC spreads closely. will post some charts tom