The Dollar index had a downside opening gap on Friday

This is the last full trading week of the year—the Christmas holiday is next week and New Years’ the week after. We are not getting any juicy things from the US today (just the Empire State and housing index), with payrolls tomorrow. Some think the payrolls are the important data but now that we already have the rate cut, a bit of gilding the lily. Tomorrow it’s Germany’s ZEW and the US PMI composite, but the true events of importance are the Bank of England on Thursday the Bank of Japan on Friday.

Expectations are for the BoE to cut and say it’s now a hold and for the BoJ to hike and say there’s more to come. Because of other conditions, the BoE cut may not drive yields down and the BoJ hike seems to have already driven yields up (buy on the rumor), so the expected shake-out may be a dud.

The non-financial market events of the past few days are so big that you have to wonder if traders are distracted—the massacre in Bondi, another shooting at a US college, the murder of a top Hollywood couple famous for left-leaning talk. Not to mention the battle of the two Kevins.

Forecast

The dollar index had a downside opening gap on Friday and these usually get filled. Yes, the 10-year yield is a bit dippy, but the cause is probably just re-positioning ahead of the year-end and not sentiment-driven, after all. Broad sentiment is dollar-negative but with risk appetite ping-ponging from on to off and back again, we can’t rule out a dollar recovery if markets get spooked by something, anything, especially the stock market.

The consensus is for the US rally to last well into the new year, but hey, a bubble is a bubble and despite our not being able to time its break, break it will. Weirdly, that may well deliver a dollar rally. But that’s weeks or months away.  In the meanwhile, the euro and some others (CAD) looks well-grounded.

Tidbit: The next Fed chair is a battle between the two Kevins—Warsh and Hassett. The market believes it will be Hassett now that he has become a kneeling vassal. Trump is likely keeping the suspense up as he judges how the stock market will react, so he won’t name Hassett until equities are roaring again. So far the stock market seems not to care. It’s the bond gang that cares. A widening yield spread signals there are still a few vigilantes expecting inflation…. someday. Since Trump prefers a weak dollar and that depends to some extent on lower yields, it’s a tightrope for him.