Wednesday, January 24, 2018

Currencies: "Dollar Takes Another Leg Lower"

Well it's about time.
In late August and September we were looking* for the breakdown and it just wouldn't come:

Not that we care all that much about FX, rather it is one of variables in the macro equation.
From a 2016 post "Global Macro: There Are Many Ways To Approach It, Here's A Good One":

A couple weeks ago I emailed a friend:
Re: posts on money
Years ago one of the mentors said you can approach macro from a lot of starting points, for him it was bonds, he had internalized the price/interest rate teeter-totter to the point that if the other parts of the matrix, currencies or metals or equities, whatever, didn't fit the paradigm he'd know he was looking at either danger or opportunity.
I can't go so far as to say they are all fungible but along with empirically derived lead/lag times, grit in the gears/slippage inefficiencies and leverage it's a close enough first approximation to use as a mental model.
The key is to have enough exposure to your subject that your understanding is innate, that you don't have to consciously think "Now when interest rates go down, bonds go up". When you've achieved this level of mastery you immediately sense when the presented facts aren't conforming to the mental model and may be worth further scrutiny.

Another way in to global macro is commodities and if this is your choice it helps to internalize curves to the point the dangers/opportunities pop when you look at them.

Permit me to present Izabella Kaminska, writing at FT Alphaville:
Bringing balance to the commodity force, not leaving it in surplus....

With that long introduction here's a short snip from Marc to Market:
North American session sold into the dollar's upticks and Asia followed suit, taking the greenback to new multi-year lows against the euro and sterling while pushing it below the JPY110 level for the first time since last September. US trade action has become latest element of the narrative the seeks to explain the dollar's slide and the decoupling of the greenback from interest rates. The euro reached a high in European turnover above $1.2350 and sterling pushed through $1.4100. The dollar eased to almost JPY109.50. The Australian dollar, which narrowly avoided an outside down day yesterday was bid through last week's high of $0.8040. Similarly, the US dollar slipped below last week's low near CAD1.2370.

At Davos, US Treasury Secretary Mnuchin provided the incentives in the European morning to continue to push the greenback lower. He expressed no concern for the recent slide and noted that a weaker dollar is "good for us as it relates to trade and opportunities."

The price action brings new option strikes into view. There is a little more than $500 mln on a JPY109.20 strike that will be cut in NY today and another $400 mln near JPY110.80. Tomorrow, there is roughly $2.4 bln of options struck at JPY110.00-JPY110.05 that expire. Today, there is also an option struck at $1.23 for 640 mln euros and 1 bln euros of options struck between $1.2250 and $1.2275 that expire.

There are two broad explanatory models of currency movement that seem to be prevalent among investors. The first focuses on the relative price of capital (interest rate differentials) and the trajectory of monetary policy. The second focuses on external imbalances (trade and current account). The seeming decoupling of the US dollar from the movement of interest rates has seen greater emphasis placed on the latter. The tariffs the US has imposed on solar panels and washing machines draws attention to the deterioration of the US trade balance.

We too have noted that despite the striking improvement of the US energy trade balance, there has been notable deterioration of the non-oil balance. Yet, it seemed that the capital flows were sufficient to offset it, and the broader current account deficit, as a percentage of GDP has been fairly steady over the last few years near 2.4% of GDP, which is less than half the size of the pre-crisis levels....MORE
*September 8, 2017
What to Watch with the Crashing Dollar
As noted back on August 1:
We're looking for the dollar index to touch 90 sometime in the next couple months
92.71 last.
Which raises the question: If oil can only hold its own in the face of a falling buck what would it do if the dollar was rising?
Ditto for gold....
And on August 30:
We're still looking for 90 on the DXY but  the last 26 hours have not furthered the cause.
92.55 up 0.37 last.... 
Which leaves us a bit over three weeks to fulfill the prophecy.
91.26 down .38 on the index after touching 91 earlier today....
DXY 89.44 down .48 (.53%)