Originally published by AxiTrader
Making America great again comes with one big sting in the tail for President Trump and his administration.
That sting could be a stronger US dollar as the improved US growth profile, better relative performance of US stocks, and a Fed which will tighten as growth accelerates under Trumponomics drives dollar buying.
That's the way foreign exchange markets usually work. Capital flows to, and finds a home in, nations where traders and money managers believe they can get the best relative return
But over the past week traders have experienced a certain level of cognitive dissonance when it comes to the direction of the US dollar. That dissonance - or inconsistency of thought - came after competing US dollar comments from President Trump and Fed chair Janet Yellen.
Last weekend Trump told the Wall Street Journal that the Chinese yuan was too weak and the strong dollar was "killing us". While the market initially ignored this comment once the focus was on it, the US dollar came under heavy selling pressure with the US Dollar Index making a low of 100.30ish.
But the following day Fed chair Yellen bulled the dollar with her comments on interest rates and the jobs market.
Yellen said the US economy was "close" to full employment. Yellen also confirmed that increasing interest rates in the US, and the policy divergence that this is likely to drive between central banks, would usually see the US dollar appreciate back to the high 101 region.
But this morning the US dollar is under pressure again and the USD index is down nearly 100 points sitting around 100.80 as traders wonder whether the Fed or Trump will ultimately win out.
It's an important question for the US economy and it's an important question for other nations, and traders.
As Janet Yellen pointed out - and BoJ governor Kuroda confirmed last week - policy divergence will drive a stronger US dollar. But a strong dollar also has the effect of tightening monetary conditions in the United States. So as the Fed tightens a stronger dollar exacerbates the monetary tightening.
Naturally that is something the Fed would subsequently take into account in its monetary deliberations. That's especially the case because a stronger US dollar also sees US growth leak into the global system via a GDP subtraction through net exports.
The transmission mechanism for that leakage is that a stronger dollar makes companies domiciled in other nations more competitive with US firms. So purchases go to offshore companies, and countries, not the US.
Clearly that is something President Trump doesn't want. But is there much he can do about it?
The first port of call would be the strong dollar policy which has become a US Treasury mantra since Robert Rubin reiterated it back in the late 1990's.
That the US favours such a policy has become locked into the global political and market psyche since Rubin. But even with this mantra the US dollar has still cycled through a 50 point range in US dollar index terms. from 90 back in 1997, up to 121 in 2001 and 2002, down to 72 in 2008 and back to 101 where it sits today.
So there is plenty of room for volatility even within a "strong dollar" policy.
That these moves disrupt global trading and competitiveness is a given. But a weak dollar in the aftermath of the financial crisis was a big bonus for a US economy in need of recovery drivers. Likewise the relatively weak Euro helps German growth but is still too strong for Greece, Italy, and Span.
Currencies matter.
That's something president Trump understands.
But with the Fed likely to raising rates at an accelerated pace in 2018 if Trumponomics is a success it will likely to be hard to restrain the stronger dollar over the medium to longer term.
For now though the market is still trying to determine whether or not the US dollar has based, is basing, or whether it has further to fall.
Last week I highlighted that the latest Bank of America (NYSE:BAC) Merril Lynch survey of the big global fund managers showed the long US dollar trade was a crowded one. The latest CFTC data of positioning by accounts who identify as speculators shows that elevated level of position has remained high.
That sets up a positioning vulnerability in the short term if an important level breaks and positions are cleared out.
What that level might be is difficult to tell given traders and institutional investors use different time frames and stop loss protocols.
But when I look at my charts in US dollar terms I see a clear top at 103.50/70 over three weeks at the end of 2016. We've now seen the US dollar weaker for 4 week's in a row and it looks like 99.50/100.00 is now the key short term support.
But as I always say - the short term outlook doesn't change unless or until this level breaks.
Have a great day's trading