TP on short USD

I’ll take: Things I Might Regret Later for $400, please Alex

My thesis on the short USD trade put on December 2 (am/FX: Taking a shot at short USD)  was that the US is cutting, the rest of the world is repricing for hikes, and the market will want to build into short USD for 2026 as that will be one of the Trades of the Year. Fed capture, big deficits, and interest rate divergence. I am feeling a bit less confident at these levels for a few reasons and thus I am going to take profit on both the EURUSD and NZDUSD here and reassess for a bit. Here’s why:

1. The consensus is not bearish USD into 2026. Part of my thesis was a simple flow story. The market was long USD on December 2, and my view was that the market would want to be short USD into 2026. However, as the guys at Spectra begin to compile the summary of bank views for 2026, the USD view is decidedly mixed. So far, we see five banks bullish USD and three bearish USD. I believe it is safe to assume that these strategy outlooks will mirror the macro speculator consensus. With USD longs now out, the spec and “setting up the book for 2026” flows are going to be more mixed than they would have been if the market was long USD and bearish USD as was the case on December 2 when I first wrote up the idea.
2. The vibes on the Fed are getting less wild and crazy. Six months ago, there were screams of agony over the coming loss of Fed independence as a large chunk of the market believed a rogue Trump puppet would come in and slash and burn the policy rate down and down some more. Now, it’s becoming clear that “affordability” will be the buzzword for the 2026 midterms, and Americans care much more about high prices, not high rates. If anything, rate cuts make the economy more k-shaped by stoking inflation and juicing equities. While I doubt the government cares much about wealth inequality, I am sure they care about voter angst on inflation. Hassett has sounded dovish in recent interviews, but not off the hizzle.
3. Most of the headline risk in the next two weeks leans somewhere between bullish USD and random.
   • Hassett is just about fully priced (Hassett 74%, Warsh 14%, Waller 4%) so the risk now is Warsh or Waller wins and we get a less captured Fed.
   • The jobs report on 16DEC has a solid chance of surprising to the top side given Initial Claims remain low, JOLTS looks to be rebounding (we don’t have November JOLTS yet, but SEP and OCT bounced), breakeven NFP job growth is low due to labor supply issues, and potential red herrings like WARN notices and AI angst have got people nervous about the US job market. I don’t have a strong view on the jobs report, but there are some reasons to believe the US labor market remains relatively okay.
   • BOJ is fully priced. I have been talking about how this one feels much like December 2024 when the BOJ was priced, they skipped, and USDJPY roofed.

To summarize:

• On December 2, the market was still holding a stale long USD position. Now, the market is a bit short USD.
• A Hassett Fed might not be as rogue as people once thought. Inflation is the political issue of the day, not high interest rates.
• The consensus from strategists is not bearish USD into 2026 (contrary to what I expected) and so the speculative and rebalancing flows could be mixed, not sell USD.
• Too much random USD-bullish headline risk now that the setup has changed and the USD has weakened.
• The 1.3800 USDCAD target from 02DEC has been exceeded.
• I am taking profit on long EURUSD and long NZDUSD.

My view on CNH has not changed. I think the PBoC will manage towards a stronger CNY soon.

One last point on EURUSD. There is a cluster of resistance here at 1.1730/80.

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AUD

Derek pointed out that AUDUSD is threatening to break its 28-week streak of trading on the 0.65 handle. Maybe bullish? Could this be a market tell? Like Teddy KGB eating an Oreo?

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Final Thoughts

1. I was chatting with Scott last night and he told me about Ryuichi Sakomoto, so I listened on my drive home from NYC to CT. Sakomoto is quite famous, but I had never heard of him, and as a non-lover of classical music (generally) – I was impressed and moved. Here are a few samples, for your listening pleasure:

Energy Flow

Merry Christmas, Mr. Lawrence

Snooze (contemporary South Korean rap over Sakamoto piano)

2. The EURSEK long is stopped out.
3. Stocks are messy and confusing.

Have a Ballon D’or kinda day.

https://www.reddit.com/r/dataisbeautiful/comments/1pj9xkn/ocworld_cup_odds_by_group/

Odds of winning the World Cup, by group

How do Haiti, Curacao, Cape Verde, and Uzbekistan qualify for the World Cup while China and India do not?

I find that impossible to understand. Surely out of billions of people those two countries could cobble together a decent team! Try harder, China and India!

good luck ⇅ be nimble