(Bloomberg View) -- If there was any doubt that the White House is actively seeking to weaken the dollar, then a tweet from President Donald Trump Monday should put the issue to rest. Trump wrote on Twitter that “Russia and China are playing the Currency Devaluation game as the U.S. keeps raising interest rates. Not acceptable!” The Bloomberg Dollar Spot Index promptly fell the most in three weeks.
By singling out the currencies of China and Russia, Trump is effectively putting the foreign-exchange market on notice that a race to the bottom is on. In Trump’s view, one of the keys to winning a trade war is through a weak currency, which helps make exports more attractive. Last April he grumbled about the dollar, telling the Wall Street Journal, “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me.” Then in January, U.S. Treasury Secretary Steven Mnuchin said that a weaker dollar is good for U.S. trade. “These weak dollar expectations will remain entrenched in currency markets, especially if the administration continues its mercantilist policy focus,” Viraj Patel, a London-based currency strategist at ING Groep, told Bloomberg News. The Bloomberg Dollar Spot Index is down 6.79 percent since Trump’s election victory and 10.8 percent since his inauguration, a move that some strategists cited as reason for the rally in stocks last year. But Trump is playing a dangerous game with the dollar.
The U.S. relies on foreign investors to buy its debt to finance the growing budget deficit. If those investors believe that the dollar will weaken, they may be less inclined to buy U.S. debt because their holdings would be worth less over time. That may already be happening. The International Monetary Fund said at the end of March that the dollar’s share of global foreign-exchange reserves fell 2.64 percentage points last year, the most since 2002. At 62.7 percent, the dollar’s overall share of reserves, while still much higher than the euro’s 20.1 percent, is the lowest since 2013.
YOU AIN’T SEEN NOTHING YET
Think volatility has been elevated the last couple of months? Just wait. That's the takeaway from data showing hedge funds increased their wagers for turbulence in the equity market for a fourth straight week, taking the number of net-long positions on CBOE Volatility Index, or VIX, futures to a fresh record, according to Bloomberg News’s Cecile Vannucci. All was calm in equity markets Monday, with the S&P 500 Index gaining 0.81 percent, even after a weekend that saw a U.S.-led missile strike in Syria and the threat of new U.S. sanctions against Russia. Perhaps investors are emboldened by the prospect of companies posting strong first-quarter earnings in the days and weeks ahead. “Earnings are going to be very good, probably up in the 15 to 20 percent neighborhood year over year. We felt that that would drive stocks higher over the course of the next two months,” Phil Orlando, chief equity market strategist at Federated Investors, told Bloomberg News. “We’re not looking for an earnings-related or economic-related impact from the Syria bombings.” One measure of cross-asset market risk -- the BofA Merrill Lynch GFSI Market Risk Indicator -- has dropped back to levels last seen when the S&P 500 hit a record in January, according to Bloomberg News’s Sarah Ponczek.
U.S. Treasury two-year note yields moved up again on Monday, reaching 2.39 percent, their highest level in almost a decade. Traders see few reasons to fight the trend, which has seen yields rise more 1 percent point since September alone, especially with Federal Reserve officials sounding like they’re not ready to back off from their plan to continue raising interest rates. At their policy session in March, most Fed officials favored either three or four rate hikes in 2018, including the move they executed at that meeting, according to Bloomberg News’s Christopher Condon and Craig Torres. “As long as inflation is relatively low, the Fed is going to be gradual,” Federal Reserve Bank of New York President William Dudley said Monday in an interview with CNBC. “Now, if inflation were to go above 2 percent by an appreciable margin, then I think the gradual path might have to be altered.” It just so happens that the government said last week that, excluding food and energy, the core consumer price index rose 2.1 percent from March 2017, the most in a year. The pace of inflation has accelerated from just under 1.6 percent in the third quarter. The Fed’s target for the benchmark federal funds rate has risen to 1.75 percent from a low of 0.25 percent in December 2015. The central bank raised rates from 1.50 percent last month, and two more increases this year would take them to 2.25 percent.
CAN ANYTHING STOP ALUMINUM?
After surging a record 12 percent last week, what could the aluminum market possibly do for an encore? How about ... rise some more? Traders on Monday pushed aluminum up more than 3.5 percent to $2,377.50 on the London Metal Exchange, the highest since September 2011. Aluminum has benefited from U.S. sanctions imposed on Russian aluminum producer United Co. Rusal, which have sent shock waves through the global metals supply chain, according to Bloomberg News’s Mark Burton. If Rusal is forced to cut output, that could exacerbate a shortage seen in markets outside China. In additiona, alumina, a key raw material in aluminum production, headed toward all-time highs last week as the sanctions exacerbated a supply squeeze sparked by production cuts at the world’s top alumina refinery in Brazil. Aluminum led metals higher on the LME on Monday, with nickel, the best-performing metal this year, headed for its best close since May 2015 as stockpiles continued to slump. Copper added 0.8 percent and zinc climbed 0.6 percent.
The cost to Hong Kong of defending the local currency’s peg to the U.S. dollar is quickly mounting. The Hong Kong Monetary Authority (HKMA) has now spent HK$13.3 billion ($1.7 billion) mopping up local dollars since the weak end of the band was reached on Thursday for the first time since 2005, according to Bloomberg News. The speed of intervention shows outflows are bigger than people had thought, according to China Everbright Bank, and could even accelerate as the U.S. Federal Reserve raises interest rates further. “The pace of HKMA’s buying is a bit faster than we expected,” Ngan Kim Man, deputy head of treasury at China Everbright Bank’s Hong Kong branch, told Bloomberg News. The aggregate balance of the city’s interbank cash supply will fall to HK$167 billion on Wednesday from the pre-intervention level of about HK$180 billion, according to the HKMA. The HKMA allows the currency to trade in a range of HK$7.75-7.85 against the greenback. But this year, there’s been a pronounced weakening in the local dollar, as it fell to HK$7.85 on Thursday, prompting the HKMA to step in and keep it from further depreciating.
The big event in markets Tuesday will be when the IMF releases its semi-annual outlook for the global economy at 9 a.m. New York time. At its last update in October, the IMF boosted its estimates for 2018 worldwide economic growth by 0.1 percentage point to 3.7 percent. Back then, the buzz was about a synchronized global economic growth. But now that narrative seems to be falling apart, as many regions are going through a bit of a soft patch. Citigroup’s surprise index for the global economy shows that the incoming data in recent weeks has fallen below estimates by the most in two years. “If you had talked to me two months ago, I would have said there are upside risks,” to global growth, Ethan Harris, head of global economics research at Bank of America Merrill Lynch in New York, told Bloomberg News. “Now I’m seeing downside risks.”
Investors Should Celebrate Return of Volatility: Robert Burgess
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Robert Burgess is editor of Bloomberg Prophets.
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