- There is a significant sea change underway from "risk on" to "risk off."
- Markets will react to data from the Fed this week.
- The impact of sanctions on Russia is impacting capital flows.
- Never short a dull market - the U.S. dollar could be ready to move higher.
The U.S. dollar (USD) has gone strangely quiet against most major pairs. The past few days have seen notable range constriction (see charts below). What is going on? A couple of quick guesses:
Macro-level cognitive dissonance. There is a significant sea change underway - or at least mounting evidence of such - from "risk on" to "risk off." This favors the USD as capital repatriates and speculative appetite shrinks. That switch is not a foregone conclusion, though, and such is akin to turning around an aircraft carrier. So forex traders may be more tentative, especially given that previous "strong dollar" trade attempts have either been rebuffed or fizzled out prematurely.
FOMC week. There is more jabber on deck from the Federal Reserve this week, and even though, as Tim Duy points out, not much is likely to change, you never quite know with that crew. Traders have been trained to fear central bank speak. It's unpredictable in both directions.
Russians doing stuff. The impact of increasing sanctions on Russia is definitely affecting capital flows. Note, for example, the fact that Chinese buyers have displaced Russian ones as top foreign buyers of Manhattan real estate. We don't know to what degree this is causing shifts behind the scenes.
Strangely high-priced oil. Crude prices have been weirdly strong given that U.S. inventories are now at record highs, even as supply surges. This could be a geopolitical thing, and thus something that sharply reverses as Middle East output ramps up (Iraq is killing it). Then again, maybe not.
Either way, never short a dull market, as the saying goes. Or at least not without a good reason, high quality situational analysis, and attractive upside plus limited and defined downside. Okay, forget the dull market cliche. Anyway, we aren't crazy about long U.S. dollar positions at this point - the price action is too disconfirming - but the chill macro winds still blow USD positive. We are watching and waiting.