Watch the U.S. Dollar
Crowded positioning sets the stage for a potential countermove.
Quickly: This is more a thinking out loud exercise. Spitballing. I plan to do more short posts like this one in the future.
This morning’s consumer price index report sets the stage for a potential decline in the value of the U.S. dollar.
How?
The CPI report came in cooler than expected.
This “better than expected” CPI report gives Jerome Powell and other Fed governors cover to be more dovish in their communications with the media. Today’s Fed meeting is the first key test of this hypothesis — and it is only a hypothesis.
Figure 3 shows clearly that markets are not expecting a rate cut from the Fed today — but, the curve is pricing in a couple of 25 bps cuts in the near future. You can see the 1 month yield is actually rising today, while everything 3+ months out is falling.
However, back to my original point, should Jerome Powell introduce a more dovish tone to the markets today, and various Fed governors back it up over the next 10-30 days — the long dollar trade could see a quick unwind.
Figure 1 shows just how crowded the long dollar trade has become. If this trade reverses we could see a significant move lower in the dollar. This would be bullish for crypto, precious metals, commodities, and commodity producers. I’d also expect it to help real estate and stocks in general.
We shall see.
— Brant
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Rates unchanged, as expected, but looks like the Fed is leaning hawkish with their dot plot. Immediate reaction is bullish dollar and bearish risk assets as the Fed is suggesting only 1 cut in 2024 vs the 2 the market was forecasting.
Remember though, my take in the article is all based on the change in tone of the Fed speakers and Powell to a slightly more dovish stance. Let's see how the press conference goes.