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  • Marc Bentin

Si Vis Pacem, Para Bellum


TD head of Forex strategy made the case yesterday that it might be more the breakout in American equities that is pushing the dollar these days than the Federal Reserve’s tightening cycle. Like most other currencies, the dollar responds first to technicals, flows second and fundamentals last but still with all three elements playing a role. The correlation between the dollar and the US stock market is now largely positive (as opposed to what it is most of the time) and proves the point of TD analyst over the near term. What the analyst inferred from this is that the “focus on equities for FX highlights the fragile nature of the U.S. dollar’s support given buybacks, fiscal stimulus, FANG outperformance, and corporate repatriation all, for the most part, remain temporary factors”. The interest rate differential favoring the dollar makes it difficult to impossible for foreign investors to hedge dollar risk and asset managers are running the largest overweighed position in US stocks in history at the same time as they disposed from European stocks and EM markets. That is not necessarily going to last forever but the implication might be that the time to worry about US stocks in particular will be the same as the time to worry about the dollar.... US Stocks started on a fairly weak tone yesterday with weakness in Asia, Europe and in the S&P future near the opening. After that and as European markets were already closed, US stocks recovered to end mostly higher with tech stocks (except Tesla!) regaining some the luster they had lost over the past few days. European stocks might be marked higher this morning but as per the precious close, yesterday brought another day of US stock market outperformance (check chart here for the divergence between Chinese and US shares) EURUSD was largely unchanged and EM currencies bounced with RUB regaining 1.4% in a snapback rally after days of losses which was probably not enough to improve the EM technical picture meaningfully but it was encouraging nonetheless to see an EM currency rally stick and EM equities rejecting the fresh lows posted earlier in the day. The central bank of Russia will meet on Friday with some expectations running that it might tighten. “Even if the financial backdrop in Russia remains robust with oil prices and twin surpluses providing a useful prop to macro activity, the rationale for slighter tighter monetary policy becomes ever more convincing,” Citigroup analysts wrote. The central bank may have a look at what Turkey will do on rates one day earlier but we doubt that tightening rates will/would make any difference. RUB has been going down, engulfed in a wave of EM currency weakness and an intentional policy of attrition from the US waving sanctions “from hell” against Russia that even the US rating agencies are saying are not achieving much to derail the Russian economy. RUB will take care of itself, supported by rising oil prices, large and ever building gold Reserves (which has gained vs. RUB, hence serving its purpose), a twin trade and budget surplus, a growing involvement on the silk road, in Africa and elsewhere among the growing list of countries outside the US and Europe eager to part ways with an excessive dependence on bullying Trump’s manners, the extraterritoriality of the USD and the Western dominated financial infrastructure. The announcement made yesterday that Russia and China will hold their biggest war games ever involving up to 300’000 troops in “conditions as close as war as possible” is emblematic of the strategic rapprochement between Russia and China that poses yet another long-term strategic challenge to the US. Looking at the reason for the US stocks rebound yesterday, it did not really need one but perhaps China saying it will join war games with Russia reduced the odds of a near term Western attack on Syria. Also cited was the fact that China seems eager to keep contained its retaliation against new sanctions (those that could be applied to an additional USD200bn Chinese exports). DM yields seem to be breaking out again (the bottom of our z-score report was populated with fixed income ETF’s, all trading between 2 and 3std below their 20dma), with the move supported in the US by an extremely strong JOLTS report that might signal a further acceleration ahead for wages. Inventory-sales ratios also continued to decline, standing at very low historical levels. German 10-year Bunds added another 3bps to 43bps following US yields higher (with 10 year approaching 3% again) and also in a mirror response to Italian budget related fears ebbing back. The Italian government is now fully endorsing the importance of sticking with EU fiscal rules, understanding that its salute rests with the EU rather than with embracing a populist Trump friendly rhetoric. Gold started the day lower yesterday prior to recover, ending the day with minor gains. Oil rallied the most since June as Hurricane Florence threatened US East Coast and as sanctions began pressuring down Iranian oil exports. 

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