Comments on FX Intervention and the US dollar

Comments on FX Intervention and the US dollar:

We have heard from Fed Chair Powell. Accordingly, he seems to have signaled a rate cut at the next meeting is baked in the cake. And we should suspect it is already baked in the price of key asset classes and the FX pack.

But what is interesting is the background stuff; as usual. We have President Trump Tweeting about currency manipulation from both China and Europe. Explicitly we know China controls its currency, implicitly many suspect Europe (through ECB largess) does. We posted a story in the Members area from Bloomberg, suggesting bank analysts are starting to seriously consider a US intervention in attempt to weaken the US dollar. But, the key point is if no other central banks get in the game, i.e. it lacks any coordinated policy effort, any US intervention will likely fail. The market is just too big for even the world’s defacto central bank to move its currency for more than a very short period of time.

Former Treasury Secretary Robert Rubin understood the currency game well; cutting his teeth as a trader at…wait for it….wait…Goldman Sachs (the firm that controls the world. :)) Rubin knew the market for FX was deep and liquid and interventions usually failed if not coordinated in a big way. Additionally, Rubin understood if a government wanted to intervene, the chances of success were much greater if said government waited for the currency to already have turned, or market sentiment suspected the currency already changed trend. It became known in the FX world as the “Rubin Rule” of intervention.

Fast forward to the Trump administration and the current global milieu. Global policy cooperation is close to non-existent and the US dollar (aka the Dollar Smile framework) is extremely competitive; i.e. the US economy is growing faster (it seems) and has a higher relative yield than its competitors. This is not the raw material of a successful intervention; it is the raw material for a fundamentally driven intermediate-term rally. And in fact, given the odds of failure, any attempt may lead to a big US dollar rally as the market loads up on dollars given away by the US Treasury.

If we add to this, the rising probability of yet more easing from the European Central Bank (ECB), the stage may be set for a big dollar rally as some worry about dollar weakness. Just the type of thing Mr. Market likes to see.