Soft Dollar Policy Waiting to Pounce
|REMINDER - There's been so much talk about tax reform over the past several weeks that the market has completely forgotten about another big theme that will likely have a serious impact on the direction in currencies. What is it? Well, we have spoken about it a lot and I will remind you in case you forgot. That theme is the US administration's attitude towards trade. Remember that whole protectionism thing. Ya...well it hasn't gone away. It has been sitting back, waiting to pounce. When you break it down, we're staring at a US tax policy that is supposed to be supportive of the US Dollar, but that is also sure to let down expectations as far as how sweet it's really going to be. And then you have this whole protectionist policy thing that hasn't made all that much of a dent yet.
THE QUOTE - If you look for it, you will find it. On Tuesday, the President sent out a tweet about it, but it was overlooked given all of the other distractions right now and given the fact that it seems the market isn't really paying as close attention to it as it should be. So here it is word for word. On Tuesday, President Trump tweeted the following : "After my tour of Asia, all Countries dealing with us on TRADE know that the rules have changed. The United States has to be treated fairly and in a reciprocal fashion. The massive TRADE deficits must go down quickly!" Now if that were a statement from the Fed Chair, the Buck would probably have sold off a few percent very quickly. Of course, that's not a comment that a Fed Chair would make, but even if it were the Treasury Secretary, the Buck would have been slammed.
LESS COMPELLING - Now I know I have made a strong and compelling argument for US Dollar strength. The thing is, we haven't seen any real follow through and until the stock market collapses, that argument won't even get a chance to prove itself. I have contended that the combination of Fed policy normalization and what should be a fall in stocks, will invite a massive way of safe haven flow that ultimately benefits the US Dollar. It still could happen, but at this point, I am concerned that there could be risk for a period where the US Dollar correlated with stocks on the way down. This would not be a conventional reaction, but in this environment, anything is possible. We have seen this type of price action already this year, though I have my doubts about it sustaining as stocks fall. Still, ultimately, I need to play into the big picture play here and looking past it all, the medium to longer term prospects aren't looking great for the Buck. So watch out for the return of the soft Dollar talk in the days ahead.
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