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US dollar index
The US dollar is near the session lows across the board today, in a reversal of the recent trend. Here are three reasons why:
1) Sell the fact on the Gaza ground invasion
The events in the Middle East this month have been awful but when it comes to war, the fear is almost always worse than the reality — at least in the past 70 years. No one wants to see war but the fear was that this would spiral into a US vs Iran war. That may still come but with the Gaza ground offensive underway and Israel’s other borders not under broad attack, the odds the main fighting is limited to Gaza have improved. Tellingly, the currency that’s falling right alongside the US dollar is the Swiss franc, which has also been a big beneficiary of safe-haven flows. Said differently: Sell the fact.
2) The Bank of Japan meeting
This started on Friday and was something I highlighted then. There is an extremely crowded USD/JPY trade that’s been a fantastic one this year but risks are becoming more two-sided after a surprisingly hot Tokyo CPI report on Friday. That’s been followed by a series of risks suggesting higher inflation forecasts and a lifting of the yield curve control cap. As a result, USD/JPY longs are clearing out and that’s putting broad pressure on the dollar.
3)Timiraos
WSJ Fedwatcher Nick Timiraos is out with his pre-FOMC preview and it highlights what many traders have been thinking about: The rise in long-term yields. It’s not a leak but it highlights that the Fed is probably done hiking because the rise in long-dated rates is the equivalent to 2-3 additional rate hikes. He also writes how that if rates stay high, it could mean rate cuts sooner than the Fed has hinted. Add in the recent declines in equities and there’s a good argument that financial conditions have tightened enough. This week’s Fed decision could be a non-event but if there’s a surprise it would be more of a Fed shift to the sidelines than something incrementally hawkish.
Add in some month-end flows and a rebound in risk assets and there are enough reasons to justify selling the US dollar despite yields 3-4 bps higher across the curve. Eyes will be on the BOJ later.