Looking at the pros and cons for the USD right now.
Different dollar exchange rates in Argentina. There is also the Coldplay dollar and the Qatar USD, among others.
August 14, 2023
The dollar is dutifully responding to higher yields and strong August seasonality, and we are now sitting on some huge levels. Let me go through three pairs, quickly, so you can see how epic the levels are.
First, USDJPY just took out the 145.25 level, which is where we broke down after the November 2022 CPI release. USDJPY had just been to 152 and got slammed by MOF intervention in October 2022.
USDJPY cratered that week of CPI and never looked back. We retested 145.25 in late June and it looked like we were set for a return to 150, but then a mysterious gravitational force, presumed to be China, was temporarily unleashed on the dollar. USDJPY did a 180, and yields followed about a week later. The red oval shows the period where USDJPY (black) led rate differentials (blue).
Turning to USDCNH, we are in what I presume to be a quiet period between initial PBoC pushback 7.28 down to 7.13, and the next round of pushback, which probably comes any second. Here is that chart:
We are just flitting through the 7.2850 level as I write this. I can’t remember any moment in the past where the PBoC sent a message on the currency (as they did with rule changes and much lower fixings last month) and then just shrugged and let it dump. I would assume we will see something in the next 48 hours as the currency has now weakened meaningfully and is nearing the 2022 highs where they dropped the hammer (7.3750/60). As is the case with USDJPY, the USDCNH story rests on widening rate differentials.
For some historical context, here are US vs. China 10-year rate differentials back to 2006. With deflation in China and loan growth moribund, Country Garden full of weeds, and the politics moving away from market economy towards redistribution… The PBoC can probably slow but not stop the rot. But short-term I would think USDCNH is at risk of another round of PBoC stabilization efforts. If you’re bullish USDCNH, just be ready to ride out a few storms.
Finally, AUDUSD is also right on megasupport from early June.
Putting it all together, seasonals and US yields are still in force, but the entry points for long USD are unattractive, and the risk of a PBoC move in USDCNH is high.
Also, the idea of getting long USD at lofty levels just as the Fed and the market come to the conclusion that soft landing, immaculate disinflation Fed rate cuts are coming in a few months makes me uncomfortable. I realize the Fed has been wrong a lot and has not always been able to deliver on their promises, but ceteris paribus the distribution of outcomes is always going to be skewed a bit towards what the Fed says they are going to do. If they say they are not cutting (which they had been saying up until recently), the bar just has to be higher for cuts. Now, rate cut pricing for 2024 represents a highly realistic part of the distribution, not just a weird synthetic S&P 500 put option.
If you look at the history of how the USD performs after the last rate hike, the output is pretty mixed. It depends on too many factors (did the USD rally on the hikes in the first place, for example?). If you think this cycle echoes 2000 somewhat with the tandem appreciation of megatech and the USD, then the last rate hike probably should be bearish USD at some point. But not right now.
If you think the US economy is going to roll over in Q4 as the ticking yield curve time bomb finally detonates as student loan repayments kick back in just as the US consumer is tapped… Interesting levels in the USD!
To be clear, this wave of USD buying feels a bit last-gaspy to me fundamentals-wise, so I don’t want to chase it, but with the clean USDJPY chart break and only half of the bullish USD seasonal in August done to date, there is no reason to fade here, either. And while I think the PBoC will push back on USDCNH, they are pushing back
No call to action today as I think there are too many crosswinds. Did you sign up for Friday Speedrun yet?
Last week’s was good for a few chuckles.
This sounds boring, but it’s not. I strongly recommend it for people of all experience levels. Some nice empirical analysis.
A Closer Look at “Cut Your Losses Early; Let Your Profits Run”
May you sing with sheer joy today.
https://g-mnews.com/en/a-guide-to-understand-different-dollar-rates-in-argentina/
Coldplay dollar!
HT Ramiro
A sort of almost unbelievably large move in Brazil. Plus: Short CADJPY.
NZD has a bunch of bullish kickers: Election, seasonality, and inflation
