The U.S. dollar has been under extreme pressure for the past couple of months. Since peaking during the height of the crisis in March just shy of 104, the U.S. Dollar Index (USDX) fell to a low this week of 92.483.
The response to that was unprecedented central bank intervention amidst biblical levels of U.S. dollar demand. But since the worst of the crisis is behind us (in theory) the markets have responded to the subsidence of acute pain with mild dollar dishoarding over the past few months.
But that means with improving U.S. economic data, which the Democrats are fighting tooth and nail through fear-mongering over a COVID-19 second wave, the dollar would eventually get off the mat.
This week’s jobs report was all the news the markets needed to remind everyone that while things are better than the worst of the crisis nothing is actually fixed.
The U.S. economy mildly beat expectations, creating 1.763 million jobs, dropping the headline U-3 unemployment rate to 10.2%.
And with that mildly bullish report the rumors of the U.S. dollar’s demise have been greatly exaggerated.
The euro flirted earlier this week with $1.19 and quickly reversed which likely seals the fate of its bullish run as the daily chart now looks bearish, setting up for next week.
Gold peaked, then crashed more than $40 on the news trying to give back a lot of its recent gains. Meanwhile commodity prices which all looked like they were set for major technical breakouts, especially oil, all fell back hard.
Oil is the most important because an improving U.S. economy should be bullish for oil but it wasn’t, which confirms that the breakout earlier this week was about dollar-induced cost-push inflation rather than any form of structural recovery of economic activity.
Overall, it’s still a bullish week for oil and potentially sets up a move back into the $60’s but the lack of a strong close to end this week, alongside copper, down $0.08 / lb to $2.84, failing to hold its recent breakout above $2.87, makes this move more a bull trap that anything else.
But, the main reason, in my opinion, for the dollar’s recent weakness has been political. I outlined this thesis in an article from two weeks ago about the current Big Lies the media are telling us about the state of world affairs right now.
They are timing this [attack on the dollar] with the fundamental change to the European Union via the EU’s bright new shiny budget and COVID-19 relief plans which were agreed upon by the EU Council last week.
It’s a simple enough narrative that also neatly coincides with everything else we’re being bombarded with daily. And it goes something like this.
The EU is Fixed, The U.S. is Fucked.
But what happens when that narrative fails to hold water? What happens when, despite epic levels of gaslighting, President Trump’s poll numbers continue to steady, if not rise?
What happens when the EU, in Brexit talks, keep losing battle after battle as the Brits simply stand their ground? The Brits are now confident they will have a deal this fall as the EU keeps caving on key negotiating points.
The key to the strong euro/weak dollar trade rests solely on Trump losing in November. That means the EU can strong arm the Brits into a terrible trade deal.
But that doesn’t happen if Trump wins re-election, as Trump is the key to the Brits’ negotiating leverage.
The conventional wisdom thinks in terms of the Democrats going ballistic with MMT, bailouts, UBI, gun confiscation and epic levels of pandering to the woke mob they first incited to attack Trump and now are subservient to.
All of that would be monumentally dollar negative, which, again plays directly into the playbook of quickly destroying the fabric of the United States and destroying the dollar to save Europe.
And that conventional wisdom is right, but only to an extent. Because the euro’s rally has been solely tied to the structural reforms that began earlier in the year.
As Yra Harris pointed out to me in a podcast we did together in June, when former German Finance Minister Wolfgang Schauble signed off on Merkel and Macron’s plan to give the EU Commission tax and spend authority, the deal was signed.
And the euro has been rallying ever since.
Yra, Nick Barisheff and I did a round table talk on all of these issues earlier this week where we went over the tactical and strategic plans investors should make relative to the U.S. dollar, gold, the euro and the next couple of years.
To close out this week, it looks like the dollar will finally make a statement like the classic Monty Python routine of not being ‘quite dead yet’ and ‘feeling much better.’
It’s the gold bulls, media pundits and The Davos Crowd acting like John Cleese saying, “no you’re not, you’ll be stone dead in a moment.”
The truth is that both are right, but just not today.
Over the past couple of months the extraordinary measures taken by the Federal Reserve to supply the world with the dollars they needed have exited the financial system.
For the first time since last September’s repo crisis the Fed has no outstanding repos on its balance sheet. Emergency loans under the CARES Act have fallen off their crisis highs and central bank dollar swap line balances have fallen more than 75% off their peak.
The emergency money out of the system leaving the financial system is a direct result of lower stress which, in turn, lowers dollar demand and allows that new supply to circulate as higher stock prices, a big jump in gold and commodity prices and a big rally in the euro, the British pound and the Japanese yen, the three main components of the USDX.
It doesn’t mean the dollar isn’t headed for the dead cart at some point in the future, but does anyone really believe that the disease which started all of this has run its course?
If so, here’s your nine pence to carry the dead bodies away, like the Turkish lira. For now, I’m still betting on the king who still doesn’t have shit all over him.
Join my Patreon if you like Monty Python Money analogies
Install the Brave Browser if you think Google has too much power to decide what you’re allowed to see.