The dollar's slump this morning may be the start of a much larger correction, according to Bloomberg's Mark Cudmore.
It's worth paying attention to the inability of both the dollar and U.S. yields to make the most of strong U.S. data this week.
And also to the strong euro-zone PMIs and higher-than- estimated inflation prints that have boosted the euro.
The main takeaway from the Fed minutes was that many of the policy makers’ forecasts for rate hikes are dependent on fiscal stimulus. That introduces some dovish-surprise risk.
Suddenly it seems more relevant that plenty of FX technicals were warning of the potential for a dollar-correction. On Tuesday, Cable made a double-low at the 61.8% Fibo- retracement from the flash-crash low. 21-DMAs were breaking in many dollar crosses. And then the post-election USD/JPY upward trendline was shattered this morning.
Now the PBOC is successfully squeezing yuan-shorts, which will further hit the broad dollar index.
My colleague Vincent Cignarella outlined five ways the dollar rally may end if Trump policy fails....
- The repatriation of $2.5t. This is meant to spur corporate investment at home, but in 2004 a similar tax holiday on overseas profits saw companies mostly pay dividends, repurchase shares and cut jobs to trim costs.
- Tariffs or destination taxes. These could raise the cost of imported goods and potentially slow the economy and derail the dollar unless Congress in tandem cuts personal taxes to increase disposable income.
- Trade pact renegotiation. This could push inflation closer to or above the Federal Reserve’s target, prompting the central bank to bring forward rate hikes. That monetary tightening without concurrent fiscal stimulus might drag on growth and the dollar.
- Infrastructure spending. Total U.S. debt is approaching $20t and Congressional leaders may fight widening the budget deficit. Senate Majority Leader Mitch McConnell has called the level of U.S. debt “dangerous.”
- Household income. U.S. real average earnings had been on a slide since the end of 2015 and linked to the decline of the dollar up until the election, when the correlation broke down on hopes of Trump’s fiscal stimulus.
My suspicion is that it may already be finished...