There are seventy-eleven reasons to shun the Dollar and hardly any to buy it

Outlook

The Australian dollar was the canary in the coal mine the day before yesterday. It was starting to scream “sell.” To be fair, the CAD and yen were showing the same thing.

Little did we know that the bond vigilantes were going to pop out of their hole and drive the 10-year yield to 4.10% and the 2/10 spread to 0.54 or up 1.7% (as of about 2:50 pm yesterday). The dollar rose across the board and in the absence of anything else compelling, we blame them. Or maybe it’s just a camp that expects the Fed is done. Blomberg’s Levin has a column showing “A close look at the distribution shows that the dots overwhelmingly fall into just two camps: one group of six that thinks Wednesday’s reduction is sufficient for the year, and a (for now) larger group of nine that expects two more cuts.” The smaller camp can prevail, and probably should.

“If the dovish bloc in the dot plot is proved wrong by the incoming data, then the ‘no change’ bloc will prevail by default. In practice, these policymakers have much in common with their more dovish colleagues. They recognize that inflation is a bit too warm, but they’re willing to look through the tariff impacts for the time being.”

This is without considering the intense political pressure. We note that the next FOMC comes before the Supreme Court ruling on firing Cook.

But we wouldn’t find a single analyst saying a single word about bond vigilantes or any other brand of seller, so this may be just a one-time flash-in-the-pan.

For what it’s worth, one analyst (Brent Donnelly) says that if the 10-year gets to 4.2%, it’s all over for equities and gold. Another has 4.5%. That’s ECR Research.com. “The S&P 500 index is due for a correction of 5–10%, but on balance we still see it remaining in an uptrend. However, if US 10-year yields rise above 4.5%, markets will send warning signals; at 5%, alarm bells will ring.”

Let’s just note that none of the standard outlets are featuring the bond market anymore—especially the WSJ. Is that because they can’t find anyone who knows what’s going on or because it’s such a tangled mess that picking it part is too hard? 

MaceNews has the spine to offer something. Here is a re-write of the story from late yesterday: The bond market wants more ammunition to take yields lower—either growth or inflation. The 10-year yield hit 4.14% from 4.08% the day before. Traders are taking some chips off the table but hesitant to make a big move for a dozen reasons, including new data ahead of the Oct 29 Fed, real money gobbling up Treasuries at any yield, massive uncertainty on the geopolitical front, the budget deficit, the Supreme Court. And we could go on. 

We don’t know, but it looks like for one day at least, buyers at any yield disappeared and some sellers came out of the woodwork. But honestly, we don’t know and apparently, nobody else does either. You have to wonder if it’s a coincidence that Trump attacked free speech and the free press most egregiously at the same time. 

Bloomberg has a remedy: “Global investors are buying US stocks and bonds while also buying derivatives to protect those investments against declines in the dollar.

The shift to dollar-hedged exchange-traded funds has occurred at an unprecedented clip, with flows into these funds outpacing those into unhedged funds since mid-year. The prospect of more interest-rate cuts from the Federal Reserve is expected to give a jolt to the phenomenon of hedging against the dollar, with some estimates suggesting a wave of fresh dollar hedging could ultimately tally about $1 trillion.”

The real mantra from global investors is more like “Hedge America” — that is, keep snapping up US stocks and bonds but do so while buying derivatives that protect those investments against any further declines in the dollar.

Starting around mid-year, and for the first time this decade, flows into dollar-hedged exchange-traded funds that buy US assets have outpaced those into unhedged funds, according to Deutsche Bank AG, which said the shift occurred at an unprecedented clip.

What it boils down to is that the notion of the exceptionalism of American markets, which seemed in jeopardy after President Donald Trump unveiled punishing global tariffs in April, is alive “with a twist” — avoiding exposure to the greenback, said Laura Cooper, a global investment strategist at Nuveen in London.

After all hedging the dollar is cheaper now. And “The real mantra from global investors is more like “Hedge America” — that is, keep snapping up US stocks and bonds but do so while buying derivatives that protect those investments against any further declines in the dollar.”

Forecast

We are guessing that the strange jump in yields was a one-time thing and confidence in the upcoming two rate cuts will resume, taking the yields back down and the dollar with them.

There are seventy-eleven reasons to shun the dollar and hardly any to buy it, at least not unhedged. So, we expect the dip to slow to a crawl, leaving Monday’s fate high in the air.

Uncertainty is far too high. The charts say sell the currencies, but the bigger trend channels say the opposite. Short-term vs. long-term—not new, but no easier. Watch the close today for any clues. The secret sauce will be the close relative to the low and other configurations signaling an end to the move. A big fat spike low but a close over the open would be preferred. Yes, down in the weeds.

Outlook

The Australian dollar was the canary in the coal mine the day before yesterday. It was starting to scream “sell.” To be fair, the CAD and yen were showing the same thing.

Little did we know that the bond vigilantes were going to pop out of their hole and drive the 10-year yield to 4.10% and the 2/10 spread to 0.54 or up 1.7% (as of about 2:50 pm yesterday). The dollar rose across the board and in the absence of anything else compelling, we blame them. Or maybe it’s just a camp that expects the Fed is done. Blomberg’s Levin has a column showing “A close look at the distribution shows that the dots overwhelmingly fall into just two camps: one group of six that thinks Wednesday’s reduction is sufficient for the year, and a (for now) larger group of nine that expects two more cuts.” The smaller camp can prevail, and probably should.

“If the dovish bloc in the dot plot is proved wrong by the incoming data, then the ‘no change’ bloc will prevail by default. In practice, these policymakers have much in common with their more dovish colleagues. They recognize that inflation is a bit too warm, but they’re willing to look through the tariff impacts for the time being.”

This is without considering the intense political pressure. We note that the next FOMC comes before the Supreme Court ruling on firing Cook.

But we wouldn’t find a single analyst saying a single word about bond vigilantes or any other brand of seller, so this may be just a one-time flash-in-the-pan.

For what it’s worth, one analyst (Brent Donnelly) says that if the 10-year gets to 4.2%, it’s all over for equities and gold. Another has 4.5%. That’s ECR Research.com. “The S&P 500 index is due for a correction of 5–10%, but on balance we still see it remaining in an uptrend. However, if US 10-year yields rise above 4.5%, markets will send warning signals; at 5%, alarm bells will ring.”

Let’s just note that none of the standard outlets are featuring the bond market anymore—especially the WSJ. Is that because they can’t find anyone who knows what’s going on or because it’s such a tangled mess that picking it part is too hard? 

MaceNews has the spine to offer something. Here is a re-write of the story from late yesterday: The bond market wants more ammunition to take yields lower—either growth or inflation. The 10-year yield hit 4.14% from 4.08% the day before. Traders are taking some chips off the table but hesitant to make a big move for a dozen reasons, including new data ahead of the Oct 29 Fed, real money gobbling up Treasuries at any yield, massive uncertainty on the geopolitical front, the budget deficit, the Supreme Court. And we could go on. 

We don’t know, but it looks like for one day at least, buyers at any yield disappeared and some sellers came out of the woodwork. But honestly, we don’t know and apparently, nobody else does either. You have to wonder if it’s a coincidence that Trump attacked free speech and the free press most egregiously at the same time. 

Bloomberg has a remedy: “Global investors are buying US stocks and bonds while also buying derivatives to protect those investments against declines in the dollar.

The shift to dollar-hedged exchange-traded funds has occurred at an unprecedented clip, with flows into these funds outpacing those into unhedged funds since mid-year. The prospect of more interest-rate cuts from the Federal Reserve is expected to give a jolt to the phenomenon of hedging against the dollar, with some estimates suggesting a wave of fresh dollar hedging could ultimately tally about $1 trillion.”

The real mantra from global investors is more like “Hedge America” — that is, keep snapping up US stocks and bonds but do so while buying derivatives that protect those investments against any further declines in the dollar.

Starting around mid-year, and for the first time this decade, flows into dollar-hedged exchange-traded funds that buy US assets have outpaced those into unhedged funds, according to Deutsche Bank AG, which said the shift occurred at an unprecedented clip.

What it boils down to is that the notion of the exceptionalism of American markets, which seemed in jeopardy after President Donald Trump unveiled punishing global tariffs in April, is alive “with a twist” — avoiding exposure to the greenback, said Laura Cooper, a global investment strategist at Nuveen in London.

After all hedging the dollar is cheaper now. And “The real mantra from global investors is more like “Hedge America” — that is, keep snapping up US stocks and bonds but do so while buying derivatives that protect those investments against any further declines in the dollar.”

Forecast

We are guessing that the strange jump in yields was a one-time thing and confidence in the upcoming two rate cuts will resume, taking the yields back down and the dollar with them.

There are seventy-eleven reasons to shun the dollar and hardly any to buy it, at least not unhedged. So, we expect the dip to slow to a crawl, leaving Monday’s fate high in the air.

Uncertainty is far too high. The charts say sell the currencies, but the bigger trend channels say the opposite. Short-term vs. long-term—not new, but no easier. Watch the close today for any clues. The secret sauce will be the close relative to the low and other configurations signaling an end to the move. A big fat spike low but a close over the open would be preferred. Yes, down in the weeds.

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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