Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
Lame duck Powell speculation hammers USD further
John J. Hardy
Global Head of Macro Strategy
Summary: The US dollar fell to a three-year low on intensifying speculation that President Trump could soon nominate a new Fed Chair to replace Powell after his term ends next May. Still, the USD is mostly only weak in the bigger perspective versus European currencies, as the JPY and commodity dollars are still well within range versus the greenback.
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The Wall Street Journal ran an exclusive piece that intensifies speculation that President Trump will nominate the next Fed Chair to replace Powell far before his term ends in May of next year. Candidates include former Fed governor Kevin Warsh, current Fed governor Christopher Waller, former NEC director Kevin Hassett and even US Treasury Secretary Scott Bessent. I lean for Warsh (polymarket.com has him at 23% odds of nomination) or someone else over Bessent. We are presumably headed in the direction of complete fiscal dominance, with the Fed increasingly subordinate to the Treasury’s priorities and agenda. In that light, the Treasury Secretary position is far more important and likely to drive the creative solutions needed to grapple with the mounting problem of US deficits and rising national debt.
In other important news, Bloomberg ran a story pointing to Fed intentions to lower the SLR for banks to allow them to hold more treasuries – something we have flagged and has been widely expected anyway, but helps to further support the US treasury market. Another policy move that has been discussed is cutting interest payments on bank reserves held at the Fed, which Fed Chair Powell has explicitly rejected as a bad idea on the grounds that the Fed would have a harder time controlling the implementation of the policy rate.
The ideal combination for continued USD weakness is most likely a continued drop in US treasury yields and an extension in the current, very benign risk sentiment, the classic middle of the “USD smile”. Less certainty for how the USD behaves if we get risk off because “bad news is bad news”, i.e., if US data deteriorates more sharply from here and this spooks equity markets. That would more likely support broad JPY strength – with GBPJPY increasingly in my sights as “wrongly priced” relative to most scenarios, but especially any scenario involving risk aversion. The most forceful potential source of fresh volatility in currencies would be any strong signal from China indicating that it wants to move the yuan more forcefully higher versus the US dollar. USDCNH has pushed into new territory for the year below 7.17 today, but there is no momentum in the move.
Chart: USDJPY
USDJPY is following through lower through the local support that developed near 144.50, which sets the focus lower on the bigger support zone below 142.50. The next US data of note is tomorrow’s US April PCE inflation data that could have the market pricing higher odds of a July cut if the core month-on-month number comes in below the 0.1% expected.
FX Board of G10 and CNH trend evolution and strength.
Note: If unfamiliar with the FX board, please see a video tutorial for understanding and using the FX Board.
The Euro remains top of the heap, but interesting to note that the JPY has outpaced the single currency since yesterday’s highs in EURJPY. Elsewhere, the NOK weak momentum looks excessive.
Table: NEW FX Board Trend Scoreboard for individual pairs. The recent USDJPY backup was so sharp that it will take a very deep sell-off today or at least another day near current levels to get the trend to switch to negative. Elsewhere, EURCHF never triggered higher as it remains hopeless mired in the range of the last two months plus.
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