The Bulls Are Back In Town, But Not For The Buck

WHERE WE STAND – ‘More of the same’ was very much the theme of trade yesterday, with Thursday proving considerably more interesting than the rather dull nature of trade on Wednesday.

The FX space was of most interest, with broad-based USD weakness the headline-grabbing market move, as the buck slumped to its weakest level in over three years against a basket of peers, with the DXY sliding back beneath the 97 figure, before paring declines a touch. Other G10s, naturally, took full advantage here, with cable rallying to its highest since October 2021, and the EUR notching an identical milestone. Incidentally, the common currency now trades almost exactly where it did upon its introduction 25 years ago – though, clearly, a hell of a lot has happened since then!

That USD selling was already bubbling away under the surface, though the move got a further kick after WSJ reporting that President Trump may seek to name his pick for Fed Chair early, perhaps as soon as September. While Chair Powell shan’t be leaving until next May, this news speaks to Trump seriously considering the ‘shadow Fed Chair’ idea that I’ve mooted before – appointing someone early, then sending them out into the wild to give as much dovish forward guidance as possible, in an attempt to massage market expectations into pricing a much looser stance when the new Chair gets their hands on the policy toolbox.

I must admit, though, that the names mooted for the job are a bit perplexing, if predictable. Kevin Warsh was an uber-hawk during his time at the Fed in the midst of the GFC; Kevin Hassett and Scott Bessent are blatant political picks, which may struggle to achieve Senate confirmation; David Malpass has never taken a monetary policy decision in his life; and, Chris Waller, while a current Fed Governor, has only recently undergone a Damascene conversion from arch-hawk, to uber-dove, in pushing for a July rate cut.

In any case, the net result of Trump going down such a route is frankly a self-defeating one. The appointment of a ‘shadow’ Chair would cause increasingly chaotic policy rhetoric, thus further weakening policy transmission. Furthermore, ever-greater political influence over the Fed – particularly with Governor Kugler set to be replaced next January too – should result in continued, and likely accelerated, outflows from both the USD, and from Treasuries, both of which seem not to need especially much by way of encouragement right now. Lastly, and probably of most annoyance for Trump, is that all of this nonsense actually makes the bar for the Fed to deliver a rate cut even higher, given mounting external pressure, and a desire to preserve policy independence.

Against that backdrop, and even though incoming US data remains solid, things are only likely to get worse for the greenback from here on in. Not only is there little-to-no sign of Trump relenting in his attacks on the Fed, but the buck was probably cushioned yesterday by corporate month-end demand, thus opening the door to further, more significant, declines once that is out of the way. In addition, over the last couple of decades, July has tended to prove the worst month of the year for the DXY, potentially leaving more pain in store for dollar bulls.

While dollar bulls lick their wounds, equity bulls are popping the champagne.

Stocks continued to take the path of least resistance to the upside yesterday, with spoos trading to fresh record highs to boot – finally breaching my long-standing target. What comes next? Most likely, even more fresh highs, with the bull case of cooler rhetoric on trade, solid data, and strong earnings growth remaining intact, and momentum clearly favouring the bulls at present. There are few signs more bullish for an asset than it printing a record high, especially in the equity complex where, right now, such a milestone is likely to see FOMO-driven buyers emerge once again.

Given all of the above, it’s pretty easy to forget that we started the week pre-occupied with geopolitical worries, and end it with all seemingly right in the world once more, at least as far as markets are concerned. My call from Monday – “I wouldn’t be at all surprised if, by Friday afternoon, crude ends the week in the red, and stocks end in the green, albeit with plenty of sabre rattling taking place in the interim” – seems to have aged rather well, surprisingly so in fact, with spoos +3% & front Brent -11% over the last week.

Even a broken clock, eh!

LOOK AHEAD – It’s finally Friday, and a light docket awaits, though do keep a beady eye out for any EoM/Q flows that may pop up through the day.

On the calendar, we have the May US PCE figures which, while being the Fed’s preferred inflation gauge, are unlikely to be especially market-moving, especially after Chair Powell told us last week his expectations for a headline print at 2.3% YoY, and core at 2.6% YoY. Final UMich sentiment figures are also due, though again shouldn’t move markets significantly.

Elsewhere, there are a handful of Fed and ECB speakers on the slate, and of course participants will also be on alert for any trade and/or geopolitical headlines that may crop up.

Besides that, the only other order of business is finding a suitable venue in which to enjoy a few cold beverages to see in the weekend!