Tariffs are whatever you want them to be.
Around 100 people died building the Hoover Dam. The first was John Tierney on December 20, 1921, and the last was his son, Pat, on December 20, 1935.
Short AUDNZD @ 1.1100
Stop loss 1.1361
Cover 31DEC
Short EURSEK @ 11.6000
Stop loss 11.8650
Flip long 06DEC
12DEC 109 / 107.50 CADJPY put spread
risking 48bps off 109.70 spot
It’s funny. Yesterday, point number three on the feedback I got from my Saturday note was that many clients told me Bessent’s past statements don’t mean much because he would have capitulated to Trump’s desired views on tariffs in order to get the Treasury job and thus his views now will not match his views in the past. This appears to be the correct view! Saturday Bessent said:
Tariffs can’t be inflationary because if the price of one thing goes up, unless you give people more money, then they have less money to spend on the other thing, so there is no inflation. The inflation comes through either increasing the money supply or increasing the government spending, and that’s what happened under Biden.
Here is what he said in the January 2024 Key Square investor letter (via NickT).
Tariffs are inflationary and would strengthen the dollar–hardly a good starting point for a US industrial renaissance. Weakening the dollar early in his second administration would make U.S manufacturing competitive. A weak dollar and plentiful, cheap energy could power a boom. The current Wall Street consensus is for a strong dollar based on the tariffs.
Anyhoo. Last night we got a DJT tweet that warns of a 25% tariff on Canada and Mexico unless they stop the illegals and fentanyl flowing into the USA.
If you think about how illegal US immigrants and fentanyl get to the US, Canada would not usually be first on your list of major exporting countries, but Canada is implicated somewhat as a secondary avenue for fentanyl delivery to the USA. See map, from this DEA report.
And while apprehensions on the Norther US border with Canada are tiny relative to those on the southern border, they have risen substantially since 2020 as mostly Indian nationals find it useful to go through Canada into the United States. Obviously, immigration was stunted in 2021 as COVID raged on, but going to websites like US Customs and Border Patrol and elsewhere, I cannot find any data on northern border apprehensions covering pre-2020. Here are two graphics.
So, you can see that while most illegal immigrants and fentanyl coming into the USA comes via China and Mexico, there is some truth to the assertion that Canada might play a role, too. The Canada / US border is 5,500 miles long and mostly unprotected. I wish everyone good luck in solving this by January 20.
In markets, I was surprised to see how little USDMXN moved compared to USDCAD, given the proportion of the problem emanating from each country. USDCAD moved 2.5 standard deviations, while USDMXN moved only 1. I don’t honestly have a good explanation for why this would be. I would think that the Canadian government could pretty easily offer up some kind of face-saving accommodation that makes Trump look like a winner, but the solutions on the Mexican and Chinese side are much more complicated and difficult.
If you trade Canadian rates, I would start to factor currency moves into your views because the Bank of Canada is going to be less excited about jumbo cuts with USDCAD above 1.40. The December 11th meeting is priced for 33bps, which I would bet is high, though we do get GDP and jobs before then. Here’s deputy governor Rhys Mendes a few hours ago:
“If the economy evolves in line with our forecast, then it’s reasonable to expect further cuts to our policy rate,” Mendes said, adding the central bank would be “looking closely” at two pieces of data: gross domestic product in the third quarter, which is set for release on Friday; and the labor-force survey, scheduled for release on Dec. 6.
If you are interested in reading about CAD pass-through to Canadian inflation, this paper from the BoC is good. Here is the most relevant chart:
USDCAD was 1.3450 or so in September, which means you’d need to get to 1.47 to see a 0.6% bump in inflation. With inflation around 2.0% to 2.5% in Canada, depending on the measure you choose, there isn’t a ton of room to work with there. Currently 1.41 is 5% above September levels, which implies a 0.3% bump to the price level in 2 months, which is not nothing. Also, keep in mind that 80% of daily closes in USDCAD since the day I was born were between 1.00 and 1.40. The psychology in Canada changes when we get above the top of that band.
All this news has obviously been good for my CADJPY put spread, which is now in the money. No plans to fiddle with it right now. And, finally on Canada … In case you don’t follow it. The Toronto condo market is not healthy.
“Just 210 new condos sold across all of Greater Toronto in October, down a whopping 84% from last year. The drop is 91% below the 10-year average, and it’s worth recalling that new home activity wasn’t particularly strong in half of those years.”
https://betterdwelling.com/toronto-new-home-prices-down-more-than-30-condo-sales-down-91/
The flows can often dominate in EURCHF because the speculative community and real money are not always particularly active there. As such, the month end repatriation flow often drives EURCHF lower. Here is the P&L of long EURCHF on t-2, t-1, and the last day of the month (t). You can see that it appears the repatriation flow either happens on value date month end (t-2) or month end (t) but not really on t-1, which is a meaningless date for hedgers. Not a ton of alpha here, but something to think about. If you’re bullish EURCHF, you might want to buy at 11 a.m. on Friday, not now, for example.
Corporate USD buying should be skewed to today even though today and tomorrow are the same value date. As such, the weak USD trade will probably gain a bit of steam this afternoon and accelerate Wednesday/Thursday/Friday. That said, I think serious EUR sellers will reappear 1.0590/1.0600 and that is the target if you’re long euros or are dying to get short. RBNZ tonight. Risk is they go 75 but I think they go 50. Even if they go 75, there is an outcome where they sound hawkish (i.e., we’re done for now!) and you fade the AUDNZD spike. A daily close below 1.1090 is extremely encouraging for shorts.
Have a dam good day.
Small reductions
Hi. Welcome to this week’s report. Dollar longs have reduced, a bit, as momentum wanes following the blowoff bottom to a 1.03 handle and the Sunday Gap higher on the nomination of Scott Bessent. Conviction on USD longs remains high, but multiple short-term obstacles are just ahead, including real money month-end rebalancing around Thanksgiving, positive EURUSD seasonality into year end, and substantial positions that are no longer quite as deep in the money.
Updating the same chart I showed last week, you can see that positioning blipped one nugget lower (from +5 to +4) even as the price of the dollar made new highs for this mini cycle. We are witnessing the unstoppable force of macro slamming full force into twin immovable objects: extreme positioning and seasonality.
Sidenote as I just referenced the irresistible force paradox: The Chinese word for contradiction (矛盾; pinyin) can be literally translated as: ‘spear-shield’). It originates from a story in the 3rd century BC…
A man is trying to sell a spear and a shield. He claims that his spear will pierce any shield, and then claims that his shield is unpierceable. When asked about what would happen if he were to take his spear to strike his shield, the seller could not answer.
This led to the idiom of “zìxīang máodùn” (自相矛盾, “from each-other spear shield”), or “self-contradictory”.
Anyway. As discussed in yesterday’s am/FX, these large USD longs are probably not going to get truly uncomfortable until / unless 1.0600/10 breaks to the topside. If it does, the broader down trend comes into question. In the meantime, prepare for corporate USD buying Tuesday mixed with Real Money USD selling Wednesday and Friday. A windy mix.
The most crowded USD longs remain EURUSD, USDCAD, and USDCNH. Short CHF also appears as a large position on our grid, too, as the market has been eyeing the extreme USD-bearish year-end seasonality in USDCHF. One thing to keep in mind… With a possible peace deal in Lebanon, and the outside shot of some Trump-brokered Russia deal, there are some headline risks if you’re long CHF.
The first person to die during construction of the Hoover Dam was J. G. Tierney, on December 20, 1921. The last person to die was his only son, Pat Tierney, on December 20, 1935.
21,000 men worked on the dam, and the total death toll is estimated as somewhere between 116 and 135. Deaths were from drowning, blasting, falling rocks, heat, carbon monoxide poisoning, falls from canyon walls and being struck by heavy equipment.
The NASDAQ almost got there, then fell off
