Dollar Strength Is Hiding In Plain Sight

By Heisenberg

And One Strategist Says It’s Here To Stay

Overnight, the yen rose against all its G10 peers because Donald Trump has lost his mind completely and is now firing everyone in sight.

On Thursday evening, the Washington Post reported that a “very stable genius” called “Dennison” is now planning on ridding himself of national security adviser H.R. McMaster who, according to some accounts, once called Trump an “idiot” with “the intelligence of a kindergartner” at a dinner with Oracle CEO Safra Catz.

This kind of thing usually gets reflected in risk appetite one way or another and right now USDJPY is even more of a natural expression than it would be anyway thanks to a variety of factors not the least of which is that the ongoing land scandal has everyone on edge about Aso and ultimately Abe, which in turn raises questions about the future of Abenomics. Here’s USDJPY overnight:


The BoJ is in a particularly tough spot here. The U.S. (whether Larry Kudlow admits it or not) has adopted a weak dollar policy by proxy and thanks to the fact that the addition of YCC to the policy mix has led to a steady taper of JGB purchases, Kuroda has a tough time convincing the market that any increase in JGB buying at regular ops is anything other than a temporary concession to calm markets.


That’s why, as Goldman wrote earlier this week, the January 9 trimming of 10-25Y purchases was met with a sustainable dip in USDJPY while the subsequent attempt to effectively negate the hawkish impact of that at the next op was quickly faded.


This is going to become a big deal at some point because it effectively means the BoJ is trapped. They have no way to lean against yen appreciation. The only way out for Japan would be overt currency intervention (a non-starter given Trump, trade, and bowling balls) or else the BoJ buying foreign bonds which would be immediately seen for what it is (a rather thinly-veiled attempt to couch FX intervention in terms of monetary policy efficacy).

The land scandal just makes that situation even more precarious as any bad political news for Abe is yen positive as it raises questions about the durability of the BoJ’s easing bias (and about the durability of Abenomics as a whole).

Anyway, Bloomberg’s Mark Cudmore is out on Friday noting that the yen is “giving [dollar strength] a cloak of invisibility.”

Cudmore is apparently going to Larry Kudlow route – only minus the suspenders and the contrasting white collar hopefully – by calling for more dollar strength ahead.

To be clear, this is not a consensus view. For one thing, most analysts think the tariffs will be dollar negative eventually. And then there’s the rapidly deteriorating fiscal outlook.

But hell, we can’t really take consensus as gospel because after all, “long USD” and “short USTs” were the no-brainer trades going into 2017 and we all know how that worked out.

So here’s KCudmore’s thesis, presented without further comment…


Dollar strength is going under the radar thanks to the yen giving it a cloak of invisibility. This is a sustainable theme that doesn’t rely on the Fed hiking more than three times this year.

  • On Jan. 24, the Bloomberg Dollar Spot Index broke down to a three-year low. Despite all the noise, the index has gone nowhere since then
  • What will surprise many is that the greenback is actually one of the best-performing currencies in the world during that period. It’s just that the yen is the absolute best, by a comfortable margin, and it constitutes 18% of the dollar index
  • The fate of the yen remains unknown amid the ongoing land- sale scandal that is clouding the outlook for Japan’s government. Every time Abe’s power is undermined, the yen appreciates because he is perceived as the mastermind behind the currency’s large depreciation since late 2012
  • All the ingredients behind dollar strength are still there and even some new ones are being added to the mix. The greenback will continue to outperform most currencies
  • The U.S. growth outlook is impressive and consensus forecasts keep on being upgraded
  • The country’s debt and currency offer positive real yields that are rare among G10
  • In the wake of tax reform, equities no longer look nearly so expensive on a forward-looking P/E basis. Oil exports continue to grow and the labor market is persistently robust
  • Next week, Fed Chair Jerome Powell is set to present an upbeat view of the U.S. economy. Moderate inflation is unlikely to see a shift in the guidance for three rate hikes in 2018 but that won’t matter much. Of far more importance is whether the terminal rate is shifted higher and that outcome is likely
  • Finally, trade tensions and political risk may hurt USD/JPY again but they don’t prevent the dollar gaining versus other currencies. U.S. tariffs are ultimately a dollar positive and, as the world’s reserve currency, it still benefits at the margin during extreme risk aversion
  • It’s going to be hard to stop the dollar rallying in the weeks ahead — even if the theme will only attract broad attention when the yen decides to play along

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