FOREX: The Dollar Is Still A Wounded Duck

Today, the dollar is riding a wave of risk-on sentiment, bolstering its strength as the market reevaluates and pulls back from yesterday's fears of a panic-induced, stock-driven emergency Fed cut. Despite today's gains, I still see the dollar as a wounded duck—it might be only a matter of time before it shows its vulnerabilities again.

Unless next week's US CPI throws us a curveball, the USD carry trade looks shaky. It seems the Fed is gearing up for an aggressive rate-cutting spree, potentially making the once-mighty dollar less of a heavyweight in the currency ring.

Japanese stocks are bouncing back like a cat with nine lives, clawing up about 7% after their recent tumble. Meanwhile, stock futures in Europe and the U.S. are perking up, pointing to what could be a sprightly open later today. Yet, yesterday's market maneuvers spilled the tea on the quirky dance between equities and foreign exchange.

Here's the juicy bit: the dollar seems to have lost its mojo as the go-to safe haven. Blame it on the lacklustre U.S. data stirring up the pot, which has investors now betting big on the Fed's aggressive easing moves. This shift has put the spotlight on other financial sanctuaries, notably the Japanese yen and Swiss franc, painting the dollar not just as a bystander but somewhat of a wallflower in the safe-haven dance.

The wager on the table was that Fed Chair Jerome Powell would leap into action, responding not only to the gloomy macroeconomic landscape but, perhaps even more keenly, to the drama unfolding in the equity markets. This scene is less about the Fed sticking to the script and more about them improvising to the tune of market jitters.

Caught in the tempest of US rate cut fever, it felt as if the Federal Reserve—or perhaps just the market itself—was conjuring a rate cut maelstrom, steering us into uncharted waters. Opting to sell the dollar yesterday might not have been my brightest moment—just another chapter in my career's anthology of questionable FX market maneuvers. Fortunately, I was managing multiple positions, and amidst the turbulence with USDJPY, I managed to eke out some profits by going long on the Euro, reevaluating my strategy as we edged closer to releasing the US ISM data.

Echoes of my old boss at NatWest, the eternally cigar-smoking Chris Chorley, resonated with me. His sage advice was a lighthouse amidst the storm, constantly reminding me never to underestimate the American consumer's robust spending power. His guidance, almost prophetic in nature, helped me navigate my trading decisions through the swirling currents of market speculation.

Navigating the currents of USDJPY has me feeling somewhat adrift. I'm picking up on some turbulence brewing behind the scenes at the Bank of Japan, likely stirred by the overnight market meltdown. This friction might anchor the BoJ to the sidelines during the initial phase of the Fed's enthusiastic rate-cutting spree until the path forward for the U.S.—whether toward a soft landing or a recession—becomes clearer. Although I still believe we'll return to the sub-144 zone, with the BoJ potentially sitting the next round or two out, we seem to have lost one side of the trade—the hawkish BoJ boost that could have kept the bullish JPY trade alive.

We've witnessed one of those rare Forex trades, carry trade unwind, that only appear every three to five years, shaking up the typically tranquil FX markets. There's no significant reevaluation unfolding on either side of the equation, just a persistent undercurrent of concern. Notably, the "Walk Like a Dollar Duck" trade is teetering on the edge, dependent on whether the Fed delivers with a dovish Mission 50 rate cut in September. However, should the Fed opt for just a modest 25 basis point cut, it could unsurprisingly rekindle the dollar's allure as a safe haven—reminding us that sometimes, less is indeed more in the complex dance of currency markets.

So, I think it's crucial to keep our eyes peeled on the economic data, the VIX, and broader risk markets. It's been an exhausting couple of weeks, and honestly, I'm out of groundbreaking ideas for today other than to suggest that we all buckle down and do our homework. Sometimes, the best action is thoughtful inaction, especially after such a frenetic period.