The dollar has left the building

US dollar under pressure

The US dollar left the building overnight, with barely an Elvis-esque “thank you very much, you’ve been a wonderful audience, uh-huh.” Despite a heavyweight 20-year US bond auction due today, yields continued tracking lower across the long end of the curve. That was all the cue markets needed to put the greenback to the sword, something the technical picture had been hinting at for the past few days.

After a temporary scare last week, financial markets have finally listened to me and realised that the US government could issue as much debt as it wants, the Federal Reserve will ensure that yields are going nowhere. For every reaction, there’s another one somewhere else (pure physics doesn’t world in the financial markets universe, along with many other things). In this case, when confronted with QE-driven currency debasement and a zero percent world, that was the US dollar. Money headed for the door seeking better opportunity elsewhere.

Equities rallied, led by tech, of course, precious metals and base metals rose with G-10 and developing market currencies following suit. With the US dollar bear market leading the way, there appears no apparent barrier to the mother of all FOMO trades continuing short of aggressive mass Covid-19 related lockdowns reappearing in the United States. Even the fiscal stimulus standoff on Capitol Hill appears to be becoming second-tier news, although its negative impact on future US data is inevitable.

In Asia today, Japan Machinery Orders for July fell by a higher than expected 22.5% YoY. That follows weak GDP data earlier this week reflecting the impact of Covid-19 on a very export-facing economy. However, Japan’s woes are a known known, and thus, will not materially affect sentiment.

The Bank of Indonesia (BOI) will announce its latest rate decision this afternoon, with Indonesia threading a fine line and having the dubious honour of owning Asia’s worst-performing currency. Having paid the price of partly monetising government debt earlier this year and failing to remotely get on top of its Covid-19 outbreak with most of Jakarta now a red zone, the BOI is threading a fine line. To support foreign investment and the currency, the BOI will pause its easing cycle. More attention will be paid to the post-announcement comments. Any hints of further debt monetisation, or further rate cuts, will leave the Indonesian rupiah even more unloved then it has been to date.

Both Britain and the Eurozone release inflation data this afternoon. A surprise to the downside of expectations will put negative rates back on the table for the UK, and the possibility of more easing from the ECB. The impact on the euro and pound will be minimal though, as the moves seen overnight and over the past months are a dollar move driven by collapsing yield differentials.

China announces its Loan Prime Rate decisions tomorrow morning. Again, the PBOC is very unlikely to cut, being reluctant to stoke more bubbles in the economy. It will content itself with outsized MLF liquidity measure launched earlier in the week, part of a trend of directing stimulus to exactly where it is needed in the economy, rather than a one-size-fits-all approach of the past.

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