I want to write a little bit about the US$ but, given the US Federal Reserve Board's Open Market Committee just released their decision on the fate of the overnight lending rate (Fed Funds) at 2pm today, perhaps I will start with the Fed.
Bottom line - no change with Fed Funds set at .75% (upper end with .50% being the lower end). The decision to leave Fed Funds unchanged was unanimous amongst Board voters. Other comments: economy warrants only gradual rate hikes, survey-based inflation expectations are little changed, near-term risks to outlook roughly balanced, inflation to rise to 2% over medium term (their goal is 2% and we are at 1.7% currently), market-based inflation gauges remain low, yada, yada, yada.
To sum it up - appears to be as expected on both the rate decision as well as the comments. If anything, I would read this as ever so slightly "dovish" (meaning that they may not raise rates any faster than last planned, which had them calling for three rate hikes in 2017). Maybe, just maybe, they don;t even raise them three times?
As for the US$, it has been on a tear since last summer. As you can see from the chart below, it rallied strongly up through the fall and went ballistic after the election (for all of the reasons we have written about like Scott just did this morning..."reflation" with the expectation of higher rates which draws investors into the US$ as it becomes a slightly higher yielding currency).
Interestingly though, as you can see on the far-right side of the chart, the US$ trade-weighted Index (DXY on Bloomberg and the most common measurement of the US$) has spent the entire month of January falling. From it's highest to it's lowest level in Jan/17, it is -4.2%. Why is it dropping if the whole world knows/thinks rates will rise and attract buyers of US$?
How about because the US$ is a very "crowded trade". As I wrote last week here: highrockcapital.ca/pauls-blog/yesterday-was-a-telling-day we talked about how either overly "long" or overy "short" positions can affect the trading of any given security. And the US$ is overly long and has been for some time. Check out the non-Commercial Long Positions (non-commercial are often seen as "hedge fund types") on the US$:
Whether they are hedge funds or not, a security can often just get too long (or short) and require a breather, at a minimum, before moving either higher or lower.
One other lesson I have learned over 30 years of trading and managing money is the following quote from Merrill Lynch's former Chief Stock Market Analyst, Bob Farrell:
"When all the experts and forecasts agree – something else is going to happen"
“If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”
Now I normally don't put much/any credence into what some Analyst-types say about valuation, market levels, trade ideas etc for the simple truth in that they are not managing money, just making recommendations or offering advice. I would rather hear the arguments from someone who is actually managing money and has their $*&@^ on the line. However, in Farrell's case, it is simply a general quote and an observation. He had ten of these now-famous quotes.
And this quote just may apply to US interest rates and the US$. Think about it - there are very few people in the world who think interest rates will not go up and that the US$ will actually go down. If everyone is set up for rising rates and a rising US$, Farrell would argue that the opposite should happen. Markets tend to take the "path of least resistance" meaning that, if it gets harder for a market, like the US$, to go higher, then it stops going higher and starts going lower...path of least resistance is lower.
My sense is that most of the damage in US interest rates (gov't bonds) has already happened and that most of the buying in the US$ has already happened.
And for micro anecdotal evidence that this is actually happening, since I started writing this at 2:05pm Feb 1st until right now at 2:50pm, 10yr US Treasury bonds have rallied or dropped in yield from 2.52% to 2.46% and the US$ DXY Index has gone from 100.02 to 99.57. Interesting.
Just a small part of the reason why we decided Monday to buy back some of our government bond exposure that we had sold down in early Sept/16. Lessons learned from 30 years of actually making these decisions (and plenty of mistakes too).