What is the Fed’s effect on the dollar?

Outlook:

Up next is the usual Thursday jobless claims, probably a small dip but possibly a big dip, depending on the effect of the Western states being under a once-in-a-century wildfire emergency.

Jobless claims have the power to move markets, but more interesting and still to be debated is what the hell the Fed actually did yesterday. We have divergent interpretations and that is interesting in its own right. According to the FT, the bond and equity sectors were disappointed they didn't get more of "its massive bond-buying programme," triggering the European Stoxx 600 to fall 0.8% at the open and "Markets in London, Frankfurt and Paris were all down about 0.9 per cent" following losses in Asia and the S&P futures down 1.3%.

This report is timestamped about 5 am ET and indeed, S&P futures are still down 1.26% at 8 am.

Separately, Goldman Sachs' Hatzius said "We interpret the lack of changes to the composition of Treasury purchases to mean that the FOMC does not currently plan to extend the average duration of its purchases, against our previous expectation that it would." Ignore Hatzius at your peril.

Bottom line, the big shot financial experts see the Fed as less dovish than they wanted and expected on the grounds of outright QE asset buying (especially at the long end). But the Fed message can be seen as more dovish if we look past "lower for longer" and appreciate that rates will be at zero well into 2024—four years!—and maybe longer if average inflation doesn't get too high.

We don't know over what period the Fed will calculate the average and what calculation method it will use, but it's a big deal. Moreover, the new focus is on employment at the low end of the job scale—waiters and waitresses, including and especially minorities. As noted above, this is a Big Deal, a shift in Fed focus from the quantity to include the quality. We guess the financial guys haven't got this point yet. When they do, they will like the Fed even less.

What is the Fed's effect on the dollar? We can't judge from the immediate response because of the "sell the news" aspect and also because of events elsewhere (Bank of England), but at a guess, rates at zero for 3-4 years or more is a big fat negative. Beneficiaries will be the emerging markets that offer a real return and maybe commodities, especially gold. If you are not getting any return on dollars for years, you might as well go for something that also has no inherent return but doesn't carry the weight of massive sovereign debt and horribly bad management.

Meanwhile, Brexit is the gift that keep on giving. Boris is whipping his Tories with amendments to the repulsive Internal Market Bill that are designed to soothe them (and the courts), but Intent is clear and Boris is too clever by half. The prospect of a hard Brexit "should" be deeply sterling negative, and to that we now add the prospect of negative rates by the BoE. Again it's important that all the BoE did was talk about it and negatives will come only if that and only if that, so it's not an actual Plan. That raises the question of whether sterling recovers when somebody says it's all just blather.

We have to mention that Bridgewater's Ray Dalio told Bloomberg yesterday that the dollar's reserve currency status is in jeopardy because "There is so much debt production and debt monetization." The dollar is down about 10% since March and the US running the printing presses had pushed Dalio into gold and other places. While Dalio is a genius and gold is the ultimate alternative investment, the same arguments need to be brought up again in defense of the dollar—it's the reserve currency not because governments say so, but because merchants prefer it as the numeraire and for good reasons—freedom from capital controls (take that, China), vast liquidity, universal acceptance. These things will be true even if it gets "debased," indicating it takes a very long time for the world to dump the ruling currency (short of war).

Story: teaching FX in East Africa for Citibank many years ago with students from banks all over the region, we asked the student to take out their wallets and show the contents. Every single one of the 30 or so persons in the room had more dollars than local currency on hand.

Politics: We have yet to see a list of potential Trumpian "October Surprises." High on the list would have to be a deal between Israel and the Saudis like the recognition achieved for other states in the region. Bahrain is not hard to understand, but the UAE was a bit of a surprise. Some experts wonder if a Saudi deal would not change the whole balance of power against Iran (and take focus, such as it is, off Syria).

Another idea is free vaccines for all before the Nov 3 election. The scientists say this is practically impossible, but Trump keeps saying he's going to get it done. A poll last week found 62% of registered voters say they fear a premature FDA stamp of approval due to political pressure. The Dems (85%) are more fearful than the Republicans (35%).

Still yesterday the Department of Health and Human Services, together with the CDC, announced a Plan to distribute vaccines to the states. The so-called playbook can change as information emerges about which vaccine does what to whom. Here's the kicker—according to The Hill, "In addition, the initial doses of the vaccine will be free of charge for patients. The administration's Provider Relief Fund contains over a billion dollars of taxpayer money that will be used to reimburse providers for uninsured patients. Officials said they are working to iron out some "complications" with Medicare, but the worst-case scenario is Medicare beneficiaries will have to pay $3.50 out of pocket."

If you believe this will actually happen, I have a bridge in Brooklyn for sale.

Meanwhile, Trump has been all over TV lately promoting "herd mentality," by which he means herd immunity, the darling of his new health advisor Atlas (a radiologist whose former colleagues at Stanford wrote a long letter saying he's just plain wrong about herd immunity). Maddow at MSNBC did the arithmetic—with the US death rate at almost 3%, herd immunity of 70% of the population (231 million) means the Trump policy calls for 6.93 million deaths. The death toll in the 1918 pandemic was less than a million. Trump is trying to hedge his bets—get votes by delivering a vaccine before election day (even if it's not safe and effective and hardly anyone can get it) and also tout herd immunity as the policy of choice. What a mess.

 

---

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports plus traders advice for only $3.95. Click here!