With the USD now nearly 7% lower since Trump told the WSJ back in April that he thinks “our dollar is getting too strong”, some – such as ING – have started to wonder if Trump’s slogan, at least in the world of FX, wasn’t MAGA but rather MEGA: Make Everyone (Else) Great Again. The bank’s head of FX strategy, Chris Turner explains:
In the FX world, Making Everyone else Great Again is the new theme. Whether intentional or not, President Trump has certainly managed to keep his word on one of his pledges: concerns about a rising $ are no longer an issue for the administration, with even the Fed’s trade-weighted index now at its lowest in a year.
When it comes to taking stock of the dollar’s latest plight, we believe there are two things at play.
- First, is the shifting view that the US economic cycle is beginning to top out given the absence of any major Trump fiscal stimulus – in effect making the somewhat rich US assets unattractive in the eyes of a global investor.
- Second, is the idea of a political risk premium weighing on the dollar; while it may be slightly premature to conclude this, it is certainly one explanation for why USD crosses have sharply decoupled from interest rate differentials in recent weeks.
Indeed, this week’s US data will be a big test of the latter idea; in theory, we would expect the USD to move higher in line with US yields were we to see an all-round robust jobs report on Friday. Today’s ADP employment data may begin to whet the appetite for a $ recovery, while Fed talk – albeit by nonvoters Mester and Williams – could firm up expectations for the 2H17 policy sequencing of a start to the balance sheet run-off in Sep and a Dec rate hike. We like long $ short-term plays against AUD & NZD in the G10 space – where weak local stories, higher global yields and seasonality all supportive factors.
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