The retail sales and PPI data bombshells only reinforces my view that a pause at the September FOMC only means that the Powell Fed is certain to raise the Fed funds rate to 5.75% in November. The terminal overnight borrowing rate in this cycle could well be 6.5%. The parabolic rise in Brent crude prices from $70 in early June to $93.4 demonstrates that the US economy is nowhere near recession and the Federal Reserve is nowhere near its dual mandate 2% inflation target.
The Atlanta Fed’s Q3 5.8% GDPNow estimate has empirical ballast and the 3.2% July CPI gave a premature “Mission Accomplished” victory lap to an anti-inflation struggle that only promises more blood, sweat and tears, to use a Churchillian metaphor after the Battle of Britain. In this scenario, King Dollar will remain resurgent against the Euro, sterling and most emerging market currencies.
The Euro’s failure to at least remain above its 100 day moving average at 1.0740 despite the ECB rate hike suggests that it is the loser in this worst of all possible macro worlds. A higher for longer, nastier Fed means interest rate spreads between US Treasury notes and German Bunds support King Dollar, as do relative economic growth rates between the US and Europe.
The Euro trades at 1.0650, down a staggering six big figures from 1.1250 high in mid-July and humiliatingly below its 200 day moving average at 1.0840. As the price of black gold flirts with $95 a barrel, there is no doubt that Europe’s terms of trade have turned dangerously negative, a macro triple whammy against the Euro amplified now by the property slump/credit crunch in Germany, the economic colossus that is one third of the EU GDP. There is now no doubt that Europe faces stagflation as the ECB rate-rises will continue even though the EU economy is in recession, a compelling argument to remain short the single currency for a target of 1.02, a macro idea I have argued ad nauseum in this post for the past 4 months, despite pushback from conspiracy theorists assuring me that de-dollarization is imminent in favour of a Chinese yuan that now trades at 16 year lows and an Indian rupee that has lost 50% of its value against the greenback in the past decade and is not convertible on the capital account. Game-set-match to King Dollar. BRICS currency? A still-born baby just aborted by President Xi Jinping when he decided to snub Modi’s G20 bash in New Delhi.
The yen has plunged to 147 against the US dollar and to its lowest trade weighted levels since the millennium. Kanda-san has publicly voiced his concern and he is Sakakibara’s successor as Mr. Yen in the Ministry of Finance. My macro tea leaves tell me that FX intervention is now imminent against the dollar in Tokyo. The Bank of Japan cannot freeze YCC forever, now that core inflation has surged to 4% and Japan’s deflationary lost decades are as dead and gone as the era of the Tokugawa shogunate. The BOJ samurai have unsheathed their swords and blood must now flow.
Also published on Medium.
