The Federal Reserve's March rate hike has awakened central banks around the world, with most eager to follow the Fed's lead by either raising their own rates or curtailing local versions of quantitative easing. As such, my "Short the Dollar" thesis from March remains intact, as hawkish actions abroad are balancing out the Fed's recent rate increase.
Consider what we see around the world:
The European Central Bank council member Ewald Nowotny recently told the newspaper Handelsblatt that the ECB could raise its deposit raise while continuing its QE bond purchases.
Meanwhile, speculation persists that hawkish Bundesbank President Jens Weidmann might replace dovish Mario Draghi as ECB president in 2019. Weidmann most recently told Securities Lending Times that the ECB should finally end its "very loose monetary policy" given the EU's apparent strong growth.
The United Kingdom
Kristin Forbes, a member of the Bank of England's Monetary Policy Committee, recently suggested that inflation "might be accelerating slightly more rapidly than expected. ... In my view, if the real economy remains solid and the pickup in the nominal data continues, this could soon suggest an increase in the bank rate."
That certainly suggests that the BOE is chomping at the bit to raise rates. Only Brexit clouds this view, but a recent sell-off in the British pound vs. the dollar and extended short positioning in the pound suggest that taking a long GBPUSD position on the Brexit dip makes sense.
The People's Bank of China recently raised interest rates on open-market-operation reverse-repurchase agreements (repos) by 10 basis points. The bank also boosted lending rates on standing-lending-facility short-term loans.
China wants to keep monetary policy stable and prudent. The PBOC understands that for the Chinese yuan to remain stable against the dollar, the bank needs to keep up with the Fed on rate hikes. Rising Chinese rates will also help contain China's soaring real-estate prices.
The Bank of Japan has refrained from suggesting any policy changes, continuing to state that the economy hasn't yet met members' inflation target. This takes on greater significance when we consider the latest G20 meeting, where a dominant United States pushed to remove language vowing to "resist all form of protectionism."
The U.S. dollar continues to drop against the Japanese yen, in line with our view from the last roundtable. I expect this move will continue, and I'd prefer to remain short on USDJPY through April as technical support gets "chewed through" by momentum funds that are switching from long USDJPY to short USDJPY positioning.
The Bottom Line
It seems very likely to me that Washington has succeeded in communicating to nations with excess trade surpluses that the status quo is no longer acceptable, and that America will only be happy with significant adjustments in relative exchange rates.
After all, we've seen the dollar move significantly lower against the yen, euro and Mexican peso since the Fed's March 15 rate hike. I expect this weakness to continue, as it remains in America's interest when renegotiating trade deals to do so when the dollar is weak relative to the countries that we're negotiating with.
The Japanese seem to have accepted the yen strengthening and have not offered much by way of jawboning to slow its rise. I'd also note that German officials are now talking the euro up rather than down.
Markets have also received confirmation from German Finance Minister Wolfgang Schauble that the United States has suggested that Germany is hiding behind perceived Greek weakness to keep the Euro artificially soft. Schauble stated that "even counterparts in Washington now have understood that debt relief for Greece is not possible under EU law." If that isn't confirmation that Washington wants Germany to sweep away Greece as an excuse for a weak Euro, I don't know what is.
The simple conclusion I'm coming to is that the United States has communicated its imperative for a weaker dollar to all global constituents. This has resulted in the Fed's recent rate hike being countered by more hawkish rhetoric in the United Kingdom and the Eurozone, plus less jawboning by Japan for a weaker yen.
That, in turn, has rendered the "Interest-Rate Differentials Will Lead to a Strong Dollar" argument dead on arrival. Instead, I continue to expect weakness in the dollar and a lower U.S. Dollar Index (^DXY).
This view was ahead of its time and non-consensus when I first raised it in March, but now the market is coming together behind it. I now expect momentum to take the dollar even lower, in line with my previous expectations.
As such, I recommend being short DXY, short USDJPY, short USDMXN, long EURUSD and long GBPUSD throughout April.
Click the banner below to read all of our Trading Strategies columns for April or watch a replay of Jim Cramer's April 5 roundtable video with columnists Douglas Borthwick, Stephen Guilfoyle, Peter Tchir and David Yoe Williams:
(Editor's pick. This column originally April 5.)
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