What is different now is that the Fed can’t avoid dealing with these simple, self-evident truths

We smelled a correction on Friday—in part because the dollar’s downdraft was contrary to robust bond market yields. Then on Monday along came a story that bashed the FX market over the head with a brick—the idea that Trump will do limited and targeted tariffs, not the wholesale trade war he had been talking about for months. Advisor Musk may be behind the change—and the leak.

For leak it is. It was not a substantiated, Trump-verified truth. During the day, Trump refuted the story and the dollar wobbled back a bit, but the damage had been done, the fever has been broken. A serious correction is very likely in the works, regardless of the backslding on Trumps remarks and the profit-taking we saw yesterday. Traders don’t think in percentages, but Bloomberg notes the euro rallied as much as 1.2%, the biggest gain since August, while the pound also jumped as much as 1%. Today we see the NZD up about 0.62% and the AUD almost 0.50%.

As for what is most likely, some commentators say that Trump’s reckless statements about tariffs are a negotiating ploy. He won’t do everything all at once, because then he will have lost his bullying capability. “Do what I want or you get a bigger tariff.” As for the tariffs paying for the tax cuts, this is named Voodoo Economics 2.0. The arithmetic doesn’t work, and in any case, reducing the effective spending power of the lower and middle classes would be both inflationary and recessionary. There’s nothing new here; we already knew all this.

What is different now is that the Fed can’t avoid dealing with these simple, self-evident truths. As the Bond Economics observer Brian Romanchuk notes, “if the Fed has any sense of self-preservation, they will lag any policy changes. This reduces the political pressure on them, as well as reflecting the possibility that any radical moves may be a political fiasco that is quickly reversed. The bond market would be left to price in Rate Armageddon, and the Fed could just ratify market pricing. ‘The bond market vigilantes made us do it!’ is an excuse that would easily sway a majority of the Republican Party.”

Extrapolating seveal phases into the future, this means higher for longer is real and the bond vigilantes will keep up the pressure on yields. We had thought 4.6-5.0% was a 10-year top. Now that seems too tame. In the end, yield does usually win the currency race.

You’d think an outright reversal to long euro, pound, et al., would not make sense given the US’ far better GDP growth and far higher yields. But sentiment does not always track economic data or relative yields religiously every minute and every day, and then there are the “historic highs” that are an open invitation to assault. This means the current correction could be vicious.

We would very much like to be able to ignore Trump, but that’s not going to be possible. Bloomberg’s Authers calls yesterday clown car Trumps’ “manic Monday.” The FT notes on the front page that he is sending Trump junior to Greenland—he still lwants to buy it, apparently from some outdated idea of the swahsbuckling colonialist (like Teddy Roosevelt charging up San Juan hill on horseback). This is ridiculous, of course—Denmark says it’s not for sale—but there is a Musk begind the curtain—Greenland has rare earths as well as strategic importance to Arctic security. This may not go away.

Forecast

It’s high-risk to grab a correction and trade it like a true reversal after only one day of evidence, but this time the evidence is abnormally strong—breaking channels and bands, driving the MACD and parabolic stop-and-reverse indicator, and so on.

At a guess, this new counter-trend move has some muscle. All the same, we don’t expect to see anything over 1.0550.

In this poltiics-charged environment, even good data this week can be twisted to appear bad—bad for the dollar. Again, sentiment can depend on biassed interpretation of slippery facts. Whether trhe dolalr rout persists may depend in large part on how the upcoming data is perceived.

Fun Tidbit: Musk has let what he perceives as his power go to his head. According to Bloomberg, “In a barrage of posts on his social media platform X over the past week, Musk has called for Prime Minister Keir Starmer to be imprisoned, urged the release from jail of right-wing activist Tommy Robinson, and — perhaps most surprising of all — called for the replacement of one-time ally and Trump friend Nigel Farage as leader of the Reform UK party … Now, Starmer’s Labour government, the Conservative opposition and Reform are all questioning whether the alliance between Musk and the president-elect can last.”

The FT names it Musk’s war on America’s allies.

Keeper Tibdit: US nonfarm payroills rose by 227,009 in Nov after the diastrous 36,000 in Oct (Boeing stike, hurricanes). The current consensus for Dec is 150,000, although Trading Economics has 200,000. Both forecasts will change upon receipt of the ADP number on Wednesday.

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