Over 10-day dollar rally may not end this week

Outlook:

The stock, bond and commodity markets are certainly noticing the wild dollar rally. Dollar rallies are rare to begin with but this is the most prolonged one—over 10 days—in decades. The problem, of course, is that very large moves are followed by proportionally large corrections.

But maybe not this week, unless there is a surprise. Today we get personal income and spending, ex-pected to show a gain in income by 0.3% (after 0.2% in July) and spending up at 0.4% after -0.1% in July. That’s the Bloomberg survey forecast. The WSJ gets a rebound in spending by 0.5%. This data set is important for a number of reasons, including the troublesome lag in personal income, but also the ac-companying PCE, the measure of inflation the Fed prefers.

The big events are the ECB meeting on Thursday and US payrolls on Friday, with payrolls still contro-versial. The consensus is for a nice number well north of 200,000, but some analysts think the weird blip in Aug can continue.

We have a number of disconnects and problems that can jump up and bite markets on the rear-end. First is the zero and negative interest rates at the extreme short end of the US curve. The FT notes that one and two-week bills used for repos are in negative territory, with the New York Fed testing out a cap on reverse repos at month-end. The 3 month is quoted at 0.1% this morning, down 2 points. Some of these prices are driven by the internal machinery of the banking and fund industries, but negative rates should always be a cause for alarm.

A disconnect with a political component is the euro today joining the other currencies traded by Chinese banks against the yuan. The banks can already trade against the USD, yen, GBP and AUD and NZD, so the euro is a final feather in China’s cap. Direct trading cuts out the middleman, the USD, in many in-stances and is no doubt more efficient. And yet China won’t let the citizens of Hong Kong put forward their own candidates for public office. The moneymen and the political regime might as well be on sepa-rate planets.

A big disconnect comes in the form of whatever the ECB days about ABS this Thursday. The press has gone to great lengths to demonstrate that there is not enough qualified asset-backed paper out there to form the basis of any reasonable central bank buying program, let alone an impressive one. If the ECB were any other central bank, a failure would get punished. But the ECB seems to get away with incon-sistencies that would fell any other. And that’s without even mentioning QE, still opposed by the BBK but probably going to be needed. If inflation tomorrow is 0.5% or less, as is likely, you’d think the emp-ty quiver would be damaging to the ECB reputation (and the euro). But somehow we suspect the ECB will weather this storm. In fact, we are worried that another pause/minor pullback might be in store. The ECB can see that critical level 1.2500 looming as well as anyone. After that, it’s down to 1.1800 (BNP Paribas). Mr. Draghi welcomes a weak euro for lots of reasons, but not a credibility-damaging rout.

It may be premature, but we would cut long dollar positions. Stay long, but with less. By the time every-one has recognized a bandwagon, it’s getting to be time to jump off.