USD bears need to survive corporate month end and FOMC then blue skies ahead
Frequency of the term “benign neglect” in books 1820 to 2022
https://time.com/archive/6815665/money-ending-benign-neglect/
highlights
Corps and FOMC then blue skies
Current Views
Long 28JAN 0.6920 AUD call for ~23bps
Spot ref. 0.6884
Sold 20% of notional at 0.69268 and will cover 50% between now and EOD. Remaining 20% will be run with a stop loss at 0.6934 looking to sell higher into Friday morning.
A test for USD bears
A test for the USD bears today as we have corporate month end coinciding with FOMC just after a blowoff top in EURUSD on the Trump comments. The benign neglect from Trump is mildly reminiscent of the 1970s policy where the US government wanted a weaker USD and stronger JPY to help rectify trade imbalances. While that era is much different in that the dollar was in a strong weakening trend, it is similar in its logic. Check out this 1977 New York Times story which reads:
Foreign exchange dealers pointed yesterday to one specific event that appeared to encourage the strong rush into Japanese yen yesterday. This was a comment made by Treasury Secretary W. Michael Blumenthal to newsmen in Washington late Thursday.
“If there were a significant appreciation of the yen,” the Treasury Secretary said, “I think it would have an impact on the trade situation.” He went on to imply that the “relatively small and gradual movements” upward of the yen and the German mark had thus far had little effect in cutting the American trade deficit.
“This was the single most important factor in the dollar’s slide today,” Citibank’s Mr. Brutsche said. “He may not have meant it that way, but it was interpreted to mean that he’s talking the dollar down again.”
The reaction to Mr. Blumenthal’s remarks was reminiscent of a similar run against the dollar last summer after Secretary Blumenthal urged Japan and other countries with a trade surplus to reduce their surpluses by allowing their currencies to rise, or appreciate.
The US government is now pursuing a stronger JPY policy and a benign neglect policy towards the dollar. The Trump comments are particularly salient in the context of the FRBNY rate check last week.
As I mentioned, USD bears need to survive the corporate USD buying today and then they can look forward to real money month end Friday as pension funds are very likely to fully hedge or even overhedge as the narrative is to increase USD hedging on the back of rising political, tax, regulatory, and confiscation risk. While all this is tail risk type stuff, the tail risk is back at front of mind and the threat to your career as a pension fund manager comes from ignoring it, not underperformance.
Stocks are up 2% to 3% this month, depending what index you look at. That will generate some decent USD selling into month end, but we need to see how many USD corporates buy today and then get through the outcome of the FOMC. My view on FOMC is that it should be a nothingburger as Powell is more of a lame duck, Fed Funds is close to neutral, and nobody has a strong need to rock the boat at this point. The doves got what they wanted and after six rate cuts into a strong economy, it’s hard to argue for more cuts and impossible to argue for hikes.
More interesting from the perspective of legacy and history will be whether Powell follows in the footsteps of Mark Carney and the people of Minnesota and takes a stand against Donald Trump. It’s easier to be the second or third person to stand up to power, and so perhaps he is emboldened and either goes on a rant about Fed independence or announces he’s not leaving the Fed when his term ends.
Earnings today
For your reference, here are the moves in the big 3 tech companies reporting earnings today. Black is close-to-close move and red is the overnight gap (calculated using the close on earnings day, then earnings comes out after hours, then compare to the open the next day). If the red line is bigger, that means price didn’t extend open to close the next day. If it’s smaller, then the price continued to trend in regular trading hours the day after earnings were reported.
Final Thoughts
- Not exactly GPIF but it’s a start!
- The AUD call has been an excellent trade. The plan is to cover the entire notional except for 20% and keep that remaining position into month end with a stop loss at 0.6934.
Have an entrepreneurial day.
