What The Cohen And Manafort News Means For The Dollar
ING Economic and Financial Analysis | Aug 22, 2018 03:55AM ET
A guilty plea by President Trump’s ex-lawyer and guilty verdict for his former campaign chairman have injected a big dose of political uncertainty into the dollar. What now?h3 USD: US politics and Trump jawboning may see longs rush to the exit doors/h3
Where do we begin? Just like that, the US dollar goes from looking like the King of the FX world to another politically infested currency (and there’s no shortage of those about). News that President Trump’s ex-lawyer Michael Cohen has pleaded guilty to charges related to campaign violations – at almost the same time as former campaign chairman Paul Manafort was being convicted – injected a big dose of political uncertainty into the dollar. While some experts say that this will have limited legal consequences for the President , Trump impeachment noise may just be another reason for speculative investors that are extremely long the US dollar to rush to the exit doors (it’s interesting to see that markets deem a Trump impeachment as a negative for global risk sentiment).
This fresh wave of negative USD news comes at a time when the President has ramped up his verbal jawboning of the currency and US interest rates – while US leading indicators are showing signs of coming off the boil (potentially as overseas tariffs begin to bite). All of this makes the USD vulnerable to a sharp positioning adjustment – prior long USD positioning clearouts have been worth around a 5-7% decline in the trade-weighted USD (BBDXY) index. In our ING’s Gustavo Rangel points out, polls are likely to be the main domestic driver for local assets going forward. The lack of clarity over whether an investor-friendly candidate will win the elections could intensify demand for FX hedging that risks triggering a BRL selloff towards 4.00-4.20.
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