(MENAFN- Khaleej Times) The foreign exchange market does not share my king dollar scenarios for 2018. After all, the price action after the US Congress passed the biggest tax cut in American history was mediocre, despite the surge in 10-year US Treasury note yields to 2.48 per cent. Is Planet Forex dead wrong? Yes, yes, yes - in my admittedly biased opinion. Why?
One, the US economic supertanker is accelerating. My retail shares have surged 30 per cent since early November as consumer confidence hits 15-year highs. The unemployment rate was last 4.1 per cent in the time of President George H.W. Bush in the early 1990s. Housing starts are at their highest levels in 2017. Mark my words, US economic growth will be four per cent next year and Bondwallahs go berserk.
Two, Wall Street prices in only two rate hikes when wage inflation has gone ballistic. This is insane. The bond vigilantes will do a Rip Van Winkle, test the new Fed Chairman Jay Powell and a new Fed board. The most powerful central bank in the world is not only "behind the curve" on inflation and Powell, a Wall Street private equity master of the universe, is way more anti-banking regulation than Janet Yellen. Five rate hikes and a firmer roll back of Dodd-Frank means king dollar does its macro boogie woogie, especially since Mario Draghi will not begin the ECB taper until September.
Three, geopolitical black swans are not priced into currency rates. A war on the Korean peninsula, an oil supply shock in the Gulf, Libya or Iraqi Kurdistan, a trade war with Mexico, a Chinese debt shock, a populist win in the Italian election, mass protests against a Kremlin-rigged elections, political unrest in the Middle East due to Trump's Jerusalem decision, Catalonia poll exit, Venezuela, etc, could all lead to a safe-haven bid in the US dollar.
Four, non-farm payrolls and retail sales will both deliver upside surprises in the next three months as Trump's fiscal stimulus and the first synchronised global economic expansion since Lehman's failure boost corporate America and Joe Sixpack's bottom line.
Five, net speculative long positions in the Chicago IMM currency futures and option skews in the cash interbank forex market tells me market positioning is nowhere near as pro king dollar as it was a year ago. I live and trade in a surreal world of second derivatives (Delta King, c'est moi, duckies!) and three dimensional financial chess. I love Thomas Hardy but hate being part of the madding crowd in the currency markets. So if Planet Forex positioning disses the buck, yummy!
Six, I see the hunky dory bromance between Trump and Comrade Xi Jinping getting ugly in 2018. Now that Trump (and the Koch brothers!) have bulldozed an unpopular tax bill through the House and the Senate, expect populist anti-China legislation. The EU, Japan and the US have issued a joint statement criticising Chinese subsidies and tariffs. Washington and Brussels even pressure the WTO not to declare China "a market economy". The message is crystal clear. A trade ware is brewing. This is bad news for global markets and good news for king dollar.
Trade wars, like Trotsky's revolution, is unthinkable until they become inevitable. What if Trump imposes a 25 per cent tariff on Chinese imports, sanctions PRC banks that trade with North Korea and brands the People's Bank of China a currency manipulator? After all, he promised all of the above in the campaign that won him the White House.
Seven, 2017 was notable for the macro risks that did not happen - a National Front victory in the French elections, a US trade war with China, a military escalation between regional powers in the Middle East, the breakdown of the Nafta negotiations with Mexico. Yet replace France with Catalonia/Poland and I expect every one of the above macro risks will rise in 2018. The London bookies also put the odds of Prime Minister May retaining power in 10 Downing Street at 50/50 now that a third Cabinet minister was sacked in a work computer porn scandal in Westminster. Three months after the German elections, Chancellor Merkel has still not forged a viable coalition in Berlin. In any case, the Fed balance sheet will shrink by $270 billion. As the world's liquidity pump sputters, king dollar will once more soar like a phoenix on the world stage. Don't mess with the Buckaroo, Jack, if you don't wanna lose the shirt of your back! Only the fittest of the fittest survive. stay alive!
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