Everyone keeps looking to the US-China trade war or the possible next government shutdown or some other Big Deal event to explain the dollar rising for 8 straight days and to a 6-week high, but maybe all we have to do is look at the yield differentials. The market didn't like the hawkish Fed so the Fed turned dovish just in time for robust payrolls data (and pretended it was not wiping egg off its face).

It was only a few days before we started to hear that upcoming Fed speakers may be sounding less dovish and more hawkish. Perhaps accidentally or inadvertently, the Fed has created a state of confusion about the rate outlook so thorough that you can plausibly tell any story you like and not look like an idiot. And plenty of commentators are doing just that. But underneath it all, the US is the only country with a positive real rate of return and a gigantic market, too, with lots of variety. Plenty of other countries have a nice real rate, but they lack the market size or confidence in the sovereign or have some other drawback. Australia has China. Mexico has Pemex and (arguably) too many pinkos.

Canada has... us. Yield differentials are an effective FX determinant only some of the time. But you have to admit that those German negatives are impressive. We still think the euro should pop up on having been deeply oversold, but changing our tune on how far and for how long. At this point it looks like the dollar can weather even a bad US-China trade outcome and another shutdown. This is too bad in the sense that it emboldens the nitwit-in-chief but it also clarified FX market priorities.

One important implication is that the FX market is actually relatively indifferent to the US-China trade war, as least with respect to the US and eurozone. Those returns of 2.4-3% are a real advantage and can take a beating.

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