What tune is that? The Trump slump.
Even though the Euro makes up almost 58 percent of the dollar index, the dollar is going down for the very same reasons the Mexican peso is going up. The poor start or pretty much non-existence of President Trump’s economic agenda and his weakening poll numbers.
Recall that the Mexican peso, at one point, became a real time gauge of the political chances of then candidate Trump. Hardline NAFTA and “The Wall” rhetoric is no longer as the U.S. political class now obsesses and is pretty much paralyzed by Russiagate.
We didn’t expect such a weak start for the Trump administration and thought the dollar would break out and challenge the 120 level in the first few years of the administration as expansionary fiscal policy, higher relative policy rates coupled with corporate tax reform would increase the U.S. growth and interest rate differentials with the rest of the world. It still might.
It’s moving in the wrong direction, and fast, however, and talk of a potential constitutional crisis in the U.S. is not helping dollar sentiment.
Any political turn around or passage of a major piece of President Trump’s economic agenda we expect will result in massive short covering in the dollar. Let’s see if “the Mooch” can work some political magic and turn things a bit for the White House.
Will that happen sometime soon? Your guess is as good as ours, but, we note here, currencies tend to trend. Until they don’t.
Both the dollar index and dollar/peso started the year with very overbought conditions. The dollar index hit its high of 103.82 on January 3rd and has since fallen 9.60 percent and the dollar/peso made its top at 22.033 on January 19th and is now down 19.91 percent.
The 92 level is a very important and critical long-term support area for the dollar index. If that doesn’t hold, look out below. Nevertheless, we are expecting a nice short-term bounce right around here. Could be wrong.
Cyclical Versus Secular
It is also worth mentioning that in terms of purchasing power parity (PPP), which is a longer term currency valuation measure, almost all the world’s currencies ended last year undervalued against the dollar. It is important to distinguish between the cyclical versus secular forces driving the dollar.