An Anti-Dollar Conspiracy?

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Market Drivers April 18, 2018
UK Inflation data misses
Iran will go to all euro transactions
Nikkei 1.42% Dax -0.04%
Oil $67/bbl
Gold $1345/oz.
Bitcoin $8095

Europe and Asia:
GBP UK Core CPI 2.3% VS. 2.5%
EUR EUR Core CPI 1.3% vs. 1.4%

North America:
CAD BOC Rate Decision

Both cable and euro were waylaid by cool inflation readings today knocking both pairs for a loop, but euro rebounded in morning Frankfurt dealing after Iran announced that it will no longer transact in dollars for any of its trades.

In UK the core CPI printed at 2.3% – far cooler than the 2,5% forecast, sending cable tumbling through the 1.4200 level as expectations of BoE rate hike decreased. Ahead of the report the market was assigning an 89% chance of a rate hike in May. After it, the odds dropped to 81%.

This was the slowest inflation number in a year and greatly undermined the case for monetary tightening in May. If tomorrow’s UK Retail Sales also shows a slowdown in demand the unwind in cable could take the pair towards 1.4100 as odds of BoE rate hike will come down even further. Cable has been in a one-way trade towards post Brexit highs over the past week and sentiment has clearly gotten ahead of fundamentals so any further negative economic news could find late longs trapped in the pair and create a selling stampede towards 1.4000 mark.

Meanwhile, in Europe, the CPI also missed its forecast printing at 1.3% vs. 1.4% eyed, but euro rebounded towards session highs after Iran announced that it will no longer use the dollar to settle transactions. The move was clearly a political gambit by the Iranian regime as a response to hostilities towards Trump administration but it may point to something deeper and far more troubling for the dollar. If other key actors begin pricing commodity goods in non-USD terms the buck’s hegemony will clearly be threatened. This is especially so when it comes to oil. The Chinese are already trying to price a contract in yuan and the Russians, burdened by a series of sanctions by US may also choose to move to a different payment method.

All of this serves to explain the dollar’s puzzling weakness in the FX market given its vast outperformance on both growth and interest rate differential level. If EURUSD can climb back above 1.2400 as the day proceeds while USDJPY break below 107.00 the market action will confirm that Iran’s political play may have longer-term economic consequences.

Boris Schlossberg
Managing Director

One thought on “An Anti-Dollar Conspiracy?”

  1. Hi, interesting idea that Iran’s very marginal international trade would have any effect whatsoever on the Supply/Demand of USD or on the Confidence of USD being the only World reserve currency.
    The large amounts of capital deciding the FX market is in the Debt market as you know.
    There is where we can find the Big Cap föows..
    • Yen debt is ocerregulated.
    • Yuan is coming but still has some serious mountain to climb as regards to Rule of Law.
    • Ruble is not even serious to consider as lobg as the Russian oligarchs exchange their capital to cyrrency asap.
    • Euro would be the only competitor to USD, but the debt is structured wrongly with seperate debts for each country under the same currency.
    Now is time to take the cobtrarian trade:
    – USD bulls are almost extinct according to Bloomberg.
    – ECB owns more than 40% of all Eurozone Gov Debt with zero or minus yoeld.
    – Eurozone has on average 100% Debt to GDP, while USA has ca. 75%.
    – EU banks have massive NPL ratio, especially in Southern Europe.
    – Youth unemployment in Southern Europe is staggering.
    – Mario Draghi is cornered, he must continue with zero/minus interest rates, repurchases of zero yielding Gov Debt and new purchases of zero yielding Gov Debt. If not, No Bid!
    – EU tries to manipulate the Euro higher. Good luck! Soon cones the OMG event!

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