By Matein Khalid: Chief Investment Officer and Partner at Asas Capital
Voltaire’s Dr. Pangloss insisted that we live in the best of all possible worlds (Voltaire predated Robespierre’s Terror and Madame Guillotine by a few decades!). The US dollar and US economy are in a Panglossian moment in 2019. Job growth is on a roll. 1Q GDP was a stellar 3.2% despite macro party poopah’s laments on the import surge and industry adjustments.
S&P 500 and NASDAQ have had the third best four months since World War Two. Consumption is up a robust 0.9%. A US-China trade deal could be imminent despite the Tweeter in Chief. The unemployment rate is the lowest since 1969 when Tricky Dick sat in the White House. The Fed’s preferred inflation (PCE) metric has fallen to 1.2%. The Queen’s at Ascot, the Tories are in power (barely), all’s well with the world in the Age of Trump! This macro zeitgeist screams King Dollar, the reason the US Dollar Index has almost risen to 98 as I write.
My tribe of financial markets punters live and die in the frontiers of the second derivative. Tribute to Dr. Pangloss, but if this is really the best of all possible macro worlds and we all long King Kong Dollar against the sad sack Euro and the quid, what next? Speculative positioning in the Chicago IMM futures market is extreme against the Euro, the Yen and the British pound – with good reason, I think the King Dollar trend continues for now. Even a 30% rise in Brent crude oil has not deterred the dollar bulls, a new macro equation linked to America’s vast shale oil empires in the Permian Basin in Texas. The USS Abraham Lincoln is heading to the Gulf to show Supreme Burrito – who is boss in the energy choke points of the Middle East.
Political unrest in Libya, Algeria and the heart of Paris (les gilets jaunes, the sans-culottes of our times as Brigette Macron is the Marie Antoinette!) is the reason to sell the Euro, not the dollar. In any case, Brexit, La Bella Italia’s unstable governance (since the stability provided by Caligula and Nero two millennia ago), the EU Parliament elections (neo-Nazis R Us) and a new ECB President to replace Dottore Draghi are all political swords of Damocles for the Euro. The ECB deposit rate is minus 0.40% while the Powell Fed’s Fed Funds rate is 2.25% – 2.50%. America has the highest economic performance and money market interest rates in the G10. This is the reason the buckaroo is King in Planet Forex.
I see no real green shoots in Europe for now, especially in the Carolingian core-Germania and Gaul. German exports are a victim of the Chinese slowdown. Brexit and a potential recession in Turkey will be new disasters for the German-French manufacturing sector. The auto industry in the Teutonic Fatherland and the Nissan-Renault fiasco in France will be toast. $72 Brent is a disaster for the oil importing economies of the West, Japan and EM. Can the Euro fall to 1.06 on these myriad macro shocks? Is the Pope Argentine?
The Brexit pantomime in Westminster and Downing Street meant owning sterling against the US dollar was dead money in April. Even sterling volatility plummeted after the UK was granted a deadline extension to October by the EU, making option strategies on cable earn chump change. Since Mrs. May rules out a customs union, the talks with Labour will be stillborn, though Corbyn’s poll numbers have popped as the Conservative Party itches for another regicide a la Mrs. Thatcher in 1990. If talks with Labour collapse, Theresa May is history. If May’s successor is an anti-European, Little Englander (blond Old Etonian, duckies?), sterling will be toast. The currency gnomes of Londonium (and moi in Dubai!) will then price in a no deal hard Brexit – and cable will tank to 1.15. Unthinkable? No. June 2016 changed the course of history and politics in Her Majesty’s sceptred isle and nothing is unthinkable any longer.
Japan has a new Emperor on Chrysanthemum Throne in Tokyo but the Empire of the Rising Sun really needs a new Prime Minister. Abenomics has failed. The economy contracted in 1Q due to a plunge in industrial output, hit by macro angst in the Middle Kingdom. Trump will not exempt Japan from auto tariffs. The Bank of Japan has not achieved Kuroda-san’s 2% inflation target. The yen? Sell in May and go away at 109 for a 112 target.
I expect the Turkish, Argentine and Pakistani currency meltdowns to trigger emerging market contagion. I expect the loonie to be weak as long as Governor Poloz mulls a rate cut and the US Congress does not ratify the Canada/Mexico trade deal. My trading range for the loonie is 1.33 – 1.38. Please, please do not mess with King Dollar.