Jack Crooks
Black Swan Capital
We have heard from Fed Chair Powell. Accordingly, he seems to have signaled a rate cut at the next meeting is baked in the cake. And we should suspect it is already baked in the price of key asset classes and the FX pack.
But what is interesting is the background stuff; as usual. We have President Trump Tweeting about currency manipulation from both China and Europe. Explicitly we know China controls its currency, implicitly many suspect Europe (through ECB largess) does. We posted a story in the Members area from Bloomberg, suggesting bank analysts are starting to seriously consider a US intervention in attempt to weaken the US dollar. But, the key point is if no other central banks get in the game, i.e. it lacks any coordinated policy effort, any US intervention will likely fail. The market is just too big for even the world's defacto central bank to move its currency for more than a very short period of time.
Former Treasury Secretary Robert Rubin understood the currency game well; cutting his teeth as a trader at...wait for it....wait...Goldman Sachs (the firm that controls the world. :)) Rubin knew the market for FX was deep and liquid and interventions usually failed if not coordinated in a big way. Additionally, Rubin understood if a government wanted to intervene, the chances of success were much greater if said government waited for the currency to already have turned, or market sentiment suspected the currency already changed trend. It became known in the FX world as the "Rubin Rule" of intervention.
Fast forward to the Trump administration and the current global milieu. Global policy cooperation is close to non-existent and the US dollar (aka the Dollar Smile framework) is extremely competitive; i.e. the US economy is growing faster (it seems) and has a higher relative yield than its competitors. This is not the raw material of a successful intervention; it is the raw material for a fundamentally driven intermediate-term rally. And in fact, given the odds of failure, any attempt may lead to a big US dollar rally as the market loads up on dollars given away by the US Treasury.
If we add to this, the rising probability of yet more easing from the European Central Bank (ECB), the stage may be set for a big dollar rally as some worry about dollar weakness.
Currency Currents is strictly an informational publication and does not provide individual, customized investment advice. The money you allocate to options should be strictly the money you can afford to risk. While every effort is made to evaluate the actual experience of subscribers, all performance figures must be considered hypothetical, and past results are no guarantee of future performance. Detailed disclaimer can be found at http://www.blackswantrading.com/disclaimer.html
Recommended Content
Editors’ Picks
AUD/USD jumps above 0.6500 after hot Australian CPI data
AUD/USD extended gains and recaptured 0.6500 in Asian trading, following the release of hotter-than-expected Australian inflation data. The Australian CPI rose 1% in QoQ in Q1 against 0.8% forecast, providing extra legs to the Australian Dollar upside.
USD/JPY hangs near 34-year high at 154.88 as intervention risks loom
USD/JPY is sitting at a multi-decade high of 154.88 reached on Tuesday. Traders refrain from placing fresh bets on the pair as Japan's FX intervention risks loom. Broad US Dollar weakness also caps the upside in the major. US Durable Goods data are next on tap.
Gold price cautious despite weaker US Dollar and falling US yields
Gold retreats modestly after failing to sustain gains despite fall in US Treasury yields, weaker US Dollar. XAU/USD struggles to capitalize following release of weaker-than-expected S&P Global PMIs, fueling speculation about potential Fed rate cuts.
Crypto community reacts as BRICS considers launching stablecoin for international trade settlement
BRICS is intensifying efforts to reduce its reliance on the US dollar after plans for its stablecoin effort surfaced online on Tuesday. Most people expect the stablecoin to be backed by gold, considering BRICS nations have been accumulating large holdings of the commodity.
US versus the Eurozone: Inflation divergence causes monetary desynchronization
Historically there is a very close correlation between changes in US Treasury yields and German Bund yields. This is relevant at the current juncture, considering that the recent hawkish twist in the tone of the Fed might continue to push US long-term interest rates higher and put upward pressure on bond yields in the Eurozone.