If you are confused about where the Dollar is going, you are hardly alone

Outlook

The government shutdown is expected to be short-lived but the BLS announced it will not deliver nonfarm payrolls on Friday for that reason. JOLTs is also postponed.

If you are confused about where the dollar is going, you are hardly alone. One school says strong growth with inflation still not appearing means a steady 10-year yield. With others displaying lowish inflation and central banks on hold, this is dollar-favorable.  Another school says that growth implies some inflation even in the absence of the tariff effect, so the risk premium must rise and take the dollar with it. This is not happening so far.

Reuters reports a Morgan Stanley study (pre-Warsh) shows “the 10-day dollar moves versus major currencies that exceeded what rate differentials would imply. At one point last week, those deviations reached about 4%–5% against the euro, yen, Swiss franc and others.” This means the dollar upside breakout is false ands the dollar should be going down.

See the chart. The problem with charts like this is they diverge all over the place and while you may think you see correlations, they are multi-week medium-term and of little help on the daily basis. Plus you get all kinds of kinky things. The correlation of the 10-year and the dollar index—see the Chart Package—is rough.

Bottom line, we have no explanation for the dollar rally. It was set off by the NY Fed “checking rates” in dollar/yen, which has almost nothing to do with anything else. It’s an aberration driven by crowd hysteria. It should reverse. But it may not, at least not soon.

Forecast

We continue to have some important threats to the dollar—turmoil at the Fed, if not the independence issue, the divergence between the rich earning and spending like crazy while the bigger portion of the population struggles. We do not have fresh dates for labor statistics, but the overall expectation remains for no real distress there. Now the ISM manufacturing data is wildly positive, and the Atlanta Fed is sticking to 4%+ growth. Granted, that’s for Q4 but still.

As noted above, the dollar breakout is irrational and crowd mania/panic. It will correct. The big overall dollar downtrend remains in place but for day trading, the environment stinks. One ray of light—Trump will do something awful, as is his wont, re-igniting negative sentiment. Tigers and stripes.