USD weakens ahead of Fed policy conference

The US dollar dipped sharply yesterday and looking at intermarket developments, the most interesting coincident story and possible driver was the breaking story that the US Justice Department and  Federal Trade Commission, together with congressional oversight, will be launching an antitrust investigation of Alphabet (Google), Facebook and  Amazon, all of which fell heavily yesterday, wiping over 100 billion off just these three companies’ market caps.

The big US tech and internet monopolies have been the world’s best large-cap performers for years and justified an overweight exposure to the US equity market. Any risk of fading glory could mean a reweighting of US equity exposure and an adjustment lower for the US dollar, independent of other factors (which may quickly overwhelm this issue). While an official investigation like this one can take forever, the repricing of these companies could continue. My stance is that any USD sell-off here will prove tactical only and at worst a positioning squeeze. 

That squeeze on long USD positions could intensify if we get a short-term breakthrough in US-China talks that our Steen Jakobsen sees as a possibility ahead of the G20 meeting later this month, based on a changed tone in China’s communication via the press. That would also likely spell the end of the JPY rally for now if the market has taken the safe haven seeking in US treasuries a bit too far here.

I’ve remarked recently not just on the magnitude of the market’s repricing of Fed policy, but also how the collapse has largely failed to steepen the yield curve, even now that the market has priced 50/50 odds that the Fed will already have cut 50 basis points (or more!) through the September Federal Open Market Committee meeting.

Others have brought valuable perspective as well, including a tweet from Jeffrey Snider (@JeffSnider_AIP on Twitter, the point man on all things USD dysfunction) pointing out that we have more aggressively reversed Fed expectations from a far lower starting point than was the case back in 2007. He tweeted late yesterday that “What if I told you that on Aug 9 2007, the day 2008 panic really began, the Eurodollar futures curve front to June 2008 was inverted by ~50 bps? What if I told you that today the curve front  to Jun 2020 was already inverted by 76 bps? Not just rate cut, whole series of them!”

Gluskin Sheff’s David Rosenberg (@EconguyRosie on Twitter) chimed in with “Surely if Powell is a “markets guy” then he’ll eventually understand that when the 2-year T-note yield  drifts more than 50 bps below the funds rates, nasty things tend to happen. Time to take the blinders off.”

Cue today and tomorrow’s Fed conference, which Fed Chair Powell will open later today and will see a number of panels and paper presentations (we have seen a few titles, none of which appear immediately compelling as a policy signal). Will the Fed recognise and corroborate the market’s aggressive repricing of its policy path? 

The Reserve Bank of Australia cut rates overnight as universally expected and released another rather complacent statement, in which it included a wait and see stance rather than guiding explicitly on rates, although the announced forecast of 2.75% GDP growth for this year and next will be an easy one to miss on and miss badly and we’re likely to see at least another cut and more likely three more for the cycle.

Trading interest

Short AUDUSD as long as below 0.7025 and NZDUSD as long as below 0.6700.
Short EURUSD via put options – for example 1-month 1.1200 today costs 38 pips with EURUSD at 1.1267

Chart: EURUSD

EURUSD surged yesterday, which saw the largest trading range in quite some time. No technical damage to the bearish case just yet, and the pair needs to achieve at toe-hold north of 1.1300 and arguably above 1.1375-1.1400 to start breaking things to the upside. Not sure we can see the euro-positive catalyst to take us there…