Some Delays

The holiday season is here

A time of good will and good cheer

Thus traders are starting

Positions departing

As we near the end of the year


And so for the past thirty days

(While Bitcoin has been all the craze)

The dollar’s been sinking

As traders are thinking

That rate hikes may see some delays


Since I last wrote before Thanksgiving, the dollar has fallen steadily against virtually all its counterparts. In fact, since that time, the euro has managed to rally 1.7% while even the worst performing G10 currency, NOK, has risen 0.75%. In the EMG sphere, it has been the CE4 currencies leading the way, but given their link to the euro this should be no real surprise. I am hard pressed to believe that there has been any substantive change in views on the Fed, which is still seemingly assured to raise rates in a few weeks’ time. Nor have there been any seeming changes to the ECB framework, which continues to point to a reduction in QE purchases starting in January, but no rate action for at least another year, maybe two. Treasury yields are within two basis points of their levels pre-Thanksgiving, so that doesn’t seem like the driver, and equity markets have continued to edge higher, which doesn’t scream out as a rationale to sell the dollar. It is only partially with tongue in cheek that I point to the Bitcoin mania, which is as classic a bubble performance as has been observed in markets since the Dutch Tulip mania in 1636-7. (If you read about Bitcoin, the bulls would have you believe that it will be replacing the dollar and thus given its limited supply is worth far more than even the current valuation. I disagree, but I digress.) In fact, I believe that the dollar’s recent weakness is nothing more than traders and investors reducing their long dollar positions, which they rebuilt starting back in September when it became clearer that the Fed would, indeed, raise rates before Christmas. And while that may be a dull explanation, I believe that it neatly sums up the situation.

We continue to exist within a market framework that is very willing to downplay potential risks, assume that volatility is a thing of the past, and has taken to heart the underlying premise of QE, namely that central banks are going to prevent anything untoward from happening and therefore investing in the riskiest assets on a leveraged basis is the road to ruin success. In this framework, the carry trade remains a key feature of investment returns, and we continue to see it implemented on a highly leveraged basis every day. After all, if you think that the global economy is growing with a stable underlying basis, why wouldn’t you seek out the highest yielding assets available? And of course, the answer is you would. You simply need to believe in the growth story. And certainly, the recent economic data has reinforced the idea that all is well. As long as this remains the case, then I imagine the dollar will remain under pressure. I guess the issue is how long will it remain the case. That is a much tougher question, and one whose answer will only be clear in hindsight. The one thing I do know is that when markets price to extremes, the reversals tend to happen more suddenly and dramatically than investors anticipate. In other words, while everything seems under control right now, it can change very quickly. And that is why you hedge! Do not let the recent lack of volatility impinge on long term hedging programs. I assure you they will be of critical value as we go forward.

But for now, the dollar does seem to have a negative bias and that seems unlikely to end soon. I don’t think it will retrace all of its gains made from early September, but certainly a trip to 1.20 in the euro is not out of the question. Perhaps it will be the data this week that will drive us there:


Today                                    New Home Sales                                    625K


Tuesday                        Wholesale Inventories                        0.4%

CaseShiller Home Prices                        6.00%

Consumer Confidence                                    124.0


Wednesday                        GDP (Q3)                                                3.2%

GDP Price Index                                    2.2%


Thursday                        Initial Claims                                                240K

Personal Income                                    0.3%

Personal Spending                                    0.3%

PCE Core                                                1.4%

Chicago PMI                                                62.5


Friday                                    ISM Manufacturing                                    58.3

ISM Prices Paid                                    67.8

Construction Spending                        0.5%


To my eyes, the most attention will be paid to any significant miss on GDP or failing that, the Core PCE data on Thursday. Remember, this is the inflation data point that the Fed follows and uses in their models, so any difference here is the one likely to have the biggest impact on their reaction function. My gut tells me that if anything, it will print slightly higher, maybe 1.5%, but certainly not high enough to change the narrative at this point. And that’s the real point, the narrative doesn’t seem to be in danger of changing right now. The lack of measured inflation, based on Core PCE, is going to continue to assuage any Fed concerns about being behind the curve. As I pointed out about changes in markets and the speed with which they occur, I believe it to be true in this case as well, the Fed will figure out they are behind the curve quite late in the process and react far more aggressively than currently priced by the market. You can expect more volatility in all markets at that time, as well as a bump in the dollar. I just don’t know exactly when that will be…but then who does?


Good luck