There’s not much point in speculating about events in Iran

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Outlook

Today the important news will be inflation in the UK (that will influence sentiment toward  tomorrow’s BoE meeting) and the Fed decision and commentary. Current thinking has not shifted from hold for both central banks and two more cuts but later this year. Some think an August cut is in store for the BoE. In the US, the Fed will update the dot-plot and may change the tapering schedule. The Fed may hint at only one cut and much later this year. We have no doubt the transatlantic phone lines are in use.

There’s not much point in speculating about events in Iran. Trump is serious about not wanting to be the guy who gets the US into another unwinnable foreign war. After all, he was a draft dodger for Vietnam and did nothing but criticize Iraq and Afghanistan. He may help Israel take this to the very end—all the nukes gone, regime change—but if it gets sticky, he will bail (which might be worse).

The end effect on financial markets and the dollar is still not known. If the US lends the bunker busters to Israel, the end effect is different from flying them with the US flag in plain view. That would mean the US had joined Israel and make US facilities vulnerable to Iranian attack everywhere in the world (plus Iranian allies, even if they are reduced these days now that Israel has beheaded the local proxies like Hama, Hezbollah and Syria).

It's not clear Trump appreciates the difference. At a guess, letting the planes fly under the US flag implies a longer war with all kinds of implications and repercussions, including to the oil supply, while letting Israel do it is tidier and less long-lasting. It’s not clear Trump would be willing to let anyone else take the credit.

He may have to. The popular mood is still for the US to stay out of other people’s wars and the Dems in Congress are working on measures to tie Trump’s hands. They wont’ work but the effort will not go unnoticed.

Back in the financial world. Bloomberg has more sour notes on foreigner participation in the US markets. It cites the BoA report that shows “Central banks have been selling Treasuries since March, suggesting that they are diversifying away from dollar assets.”

“Treasuries held by global central banks and other official entities in custody at the New York Federal Reserve fell $17 billion in the week through June 11 on average, extending their declines since late March to $48 billion.

“In addition, foreign holdings in the Fed’s reverse repurchase agreement facility have dropped roughly $15 billion since late March. The decline is “unusual” because central banks typically buy Treasuries when the dollar is weak, as it has been this year, strategists led by Meghan Swiber wrote in a note Monday, with the title  ‘Foreign UST demand shows cracks.’”

The ”sell America” trade can be seen in the Bloomberg spot dollar index, down about 8% so far this year and near a 3-year low. “The foreign demand trajectory going forward is concerning especially in light of more global investors looking to reduce US assets or increase hedge ratios… The strategists also pointed to ‘a continued weakening’” in foreign participation at the most recent 2- and 20-year auctions.”

“Global fund managers are more underweight the U.S. dollar than at any point in the past two decades, according to Bank of America’s latest Global Fund Manager Survey, reflecting a major shift in sentiment amid concerns over U.S. fiscal stability and diminishing rate support.” Bank of America writes “Relative to history, investors are overweight the Euro, bonds, & utilities and are underweight the U.S. dollar, energy, & US stocks.”

The new big fear that has jumped to the top of the list is Trump’s recklessness and inability to learn facts, theories and military/foreign affairs strategies. The guys on TV are smart and capable, but Trump is not listening to them and thinks he knows better. The White House says Trump is “weighing his options.” No. He will act on impulse.

Forecast: Trump is not taking the US into this war but markets fear it, hence the flood into the dollar. As it becomes clearer exactly what the US will and won’t do, the giant dollar bid should fade away and traders return to shunning it. But no one can predict the outcomes as they develop. We can as easily see Trump talking down the Israelis as loaning them some bunker busters.

We expect the war panic to subside and all the way, but can’t count on it until we get more hard news. It’s terrifying to think that the fate of several million people depends on this one incompetent guy who never listens to experts and won’t read intelligence briefings. At the same time, he gains nothing from prolonging this particular uncertainty and will seek to show himself the most powerful man in the world as fast as possible.

Keep in mind that both China and Europe are hatching plans to take over from the dollar as the reserve currency and numeraire. Weirdly, if the US does join the war as a full partner to Israel, it would dash those hopes.


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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