Dollar is overbought by several measures, but no respite is in sight until Retail Sales

One of the latest Fed speeches from Waller sounds a note of caution: “I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting.” This is a reference to sticky inflation and the need for confirming data.

The dollar is overbought by several measures but no respite is in sight until retail sales on Thursday. Even if sales were to disappoint, it would probably not be enough to do more than a temporary dent. This is because the same day brings the ECB rate decision, highly likely to be a rate cut, if accompanied by griping and complaining about needing to do it. It’s somewhat of a relief to have the focus taken from all Fed, all the time.

The problem arises from the charts showing the euro oversold, along with nearly every other currency. Normalcy calls for a big, fat corrective move, if not (perhaps) before testing the 200-day moving average. In the stock market, the 200-day MA has no historical statistical significance. It just means “long-term” and that has psychological influence.

In the euro/dollar, it’s a bit better as a predictive tool, if not always and with a dreadful lag. It served as support in Feb and May 2023, but not since. We have had eight breakouts of the 200-day since then and none of them had lasting value. See the chart.

It's not just the charts that are a worry. The anxiety level is rising by the minute. Anxiety is coming from the geopolitical situation that Jamie Dimon warned is “treacherous” and “getting worse.” We would include the US election as having those two characteristics, too. The election is only 20 days away and we all know a Trump win spells serious problems for the US economy. Anxiety arises also from a possibly too-complacent Fed and Treasury, and ongoing and possibly rising distrust of the government by Trumpers and non-Trumpers alike. 

Problems in other economies are too numerous to list—the French budget, the Labour party promising roses, right-wingers lurking under every bush. China. Will the new Japanese government do something about the yen? 

Bloomberg points out that the rate cut expectations for the US and Europe has them in perfect sync going forward. Gee, what can go wrong?

Even though the biggest problem (Trump) is an American problem, the dollar benefits from rising risk aversion. It hasn’t hit the stock market yet but some gloomy types see a peak coming closer, “buy in October” notwithstanding.  New record highs are themselves a warning, according to the Gloomies. We are also worried about the dollar getting too strong and setting off a vicious round of profit-taking.

Another worry is the double hurricanes making a mess of upcoming labor market data and maybe inflation, too. The Fed meets after the Nov 5 election, but we can easily miss the election outcome by then. Core and super-core already argue against a November 7 rate cut, but maybe the Fed will see the need for a little more push. If this becomes a widespread view, the dollar can fall back considerably. But that’s for after this week.

Geopolitical Tidbit: The story about Israel agreeing not to hit Iranian nuclear facilities is almost certainly a deliberate leak from the Biden white House. This is something Biden has been pressing Netanyahu for, and whether Israel has agreed or not, releasing the story pressures him to go along.

Journalist Woodward’s new bookWar details excellent Biden foreign affairs management regarding both Russia and Israel, breaking with the dreadful mismanagement of the Bush Two experience. One theme: no American boots on the ground. New fact: Biden sent Harris to convince Ukraine it had intel that Russia was going to invade and convince Macron, too—neither believed it at first.

And telephone calls to Moscow told Putin and his war minister “no tactical nuclear attack on Ukraine.” Putin was indeed planning exactly that and the US has stopped it.

The American public is not well informed about US policy or the behind-the-scenes stuff, but ten seconds of thinking would have them deduce that if Trump is elected, he would give Ukraine to Putin and let Netanyahu bomb Iran to bits, either potentially starting the first nuclear war.

Forecast

The dollar is on track to continue higher until something comes along to change minds. This is the basic rule of momentum—an object in motion stays in motion until something stops it. Financial prices are not obedient to the laws of physics, but never mind—traders have that in their mindset. We think we have at least a few more days or weeks of dollar strength, and more if anxiety continues to get hotter. Also, one possible outcome: the US continues to see sticky inflation, putting the Fed on pause, while the eurozone keeps its falling inflation, putting pressure on the ECB.

US Politics: A major poll to be seen everywhere yesterday had Harris and Trump neck-and-neck at 49% each. PredictIt had Trump ahead 54-49. Is it really possible Trump erased Harris’ lead, small though it was, let alone is prevailing?

No. Blame it on polling errors, some of which are inherent in polling and some specific to this election. First up is people lying to the pollsters. That accounted for Trump’s surprise win in 2016. If the people being polled had told the truth, it would not have seemed so obvious that Clinton would win. This time we have a black woman vs. a white man. Tired old prejudices would say that makes it a no-brainer. But we increasingly discard tired old prejudices. The Civil Rights Act was 60 years ago, for heaven’s sake.

Polling error may apply to voters now when it comes to the issue of women’s body sovereignty. More women vote than men, which is not to say men don’t also see the evil unfairness of the Trump policy stance. Pollsters find that abortion comes after the economy/inflation/immigration on the ranking of concerns, but on Nov 5, it might well rise to the top of the list.

Then there’s the competence of the Harris team in contrast to the incompetence of the Trump team and Trump himself, with his word salad and lies. Trump is a notoriously bad manager (six bankruptcies, two criminal indictments, love affair with Putin, Orban and Kim Jong Un, etc.). Important Republicans call him unfit for office.

We are as worried about what Trump will do when he loses the election as about the election itself. He has open plans to disrupt the count and challenge the count, legal and otherwise, and secret plans to employ violence. We already have hillbilly nitwits getting arrested for threatening FEMA hurricane workers. That about 500 insurrectionists are in jail right now because of Jan 6 doesn’t deter them.

It's amazing that foreigners and their press are so involved with following the US election. Well, they should be. Trump is like a bad Mother Nature event for them. 

 

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This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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