What the Cohen and Manafort news means for the dollar
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?
USD: US politics and Trump jawboning may see longs rush to the exit doors
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 latest piece ‘Dethroning the King’, we discuss five (out of the box) ways in which President Trump could weaken the dollar. While playing with dollar policy is like playing with fire – with history showing how markets can and will punish you for reckless dollar policy, we feel that all bets are off with this administration.
GBP: Lots of bad news priced in but too early to signal all-clear on politics
It’s clear that a lot of bad news is priced into a pound plagued by twin sources of risk premia (see our note for more context). But when it comes to Brexit and the currency, talks between the UK and the EU are not necessarily the primary short-term risk. In fact, some investors may have found comfort from the Raab-Barnier presser yesterday – especially as it was clear that the EU isn’t actively looking to push the UK off any Brexit cliff edge (which makes sense given that a no-deal Brexit would be somewhat damaging to both economies). The inherent willingness of both sides to find a Withdrawal Deal solution should serve as a bit of a backstop to the degree of no-deal Brexit risks priced into the currency. But when it comes to GBP and political risks, it is far too early to signal the all clear; the biggest test for the pound will be the return of a divided UK parliament from their summer recess and the upcoming Party Conference Season. A murky UK political backdrop may continue to put a dampener on GBP in the near-term – but as we noted last week, risk-reward may no longer favour chasing the pound much lower from these levels. We think GBP/USD at 1.27 (and EUR/GBP at 0.91) reflects a good chunk of Brexit negativity and look for a stable, yet volatile, pound.
BRL: Expect more voter volatility ahead of Brazil’s presidential election
The Brazilian real is significantly underperforming the Latam FX universe – a sign that the upcoming contentious presidential elections (7 October) are starting to take over as the key driver for the currency. As 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.
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).