The Big Dollar Reset Amidst Tariff U-Turns | Macro Monday ft. Andreas Steno & Mikkel Rosenvold

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1:29Hello out there. Welcome to another edition of Macro Monday. We're recording to you live here from Copenhagen after yet another action-packed week and weekend, Andreas. No rest for the wicked. How are you this afternoon? Well, all good. I think it was a really, really interesting week last week, especially the size that we have of so-called dollar debasement. The dollar traded in a very odd way last week, and it's obviously something that a lot of people focus on right now. So I think we should spend some time on discussing the dollar outlook as well today, because it's very rare that we see a disconnect between bond markets and foreign exchange markets in dollar terms, as we saw last week.

2:15It's very, very rare. I cannot underscore that enough. We'll do that in the rest of the day into much more depth on that. Remember to post all your questions, whether you're listening in on YouTube, Twitter, or the Real Vision app. Please post your questions for us. remember that this is a sneak peek into all the research that we do here, standard research, as well as on Real Vision. To catch the full extent of our research and analysis, you should reach out for the Pro Macro package within Real Vision. That also gives you access to no less than two Ask Me Anything shows this week, one with the role tomorrow at 2 p.m.

2:48Eastern Time, and address you, Host, and Ask Me Anything on Wednesday at 11 a.m. Eastern Time. So lots to look out for for Pro Macro subscribers. this is obviously our weekly free show so this is the show where we try to cut through all the noise and give you the macro overview that you need and perhaps Andreas a good time to play our usual little jingle here because especially perhaps in times like this where we are trying to decipher what goes on within Trump's head remember that all our trade recommendations and research might be sometimes maybe good sometimes maybe shit Yes, as usual, Andreas.

3:31And, Andreas, before we dive into the dollar and the outlook for that, we have a couple of trade ideas for that as well. Andreas, we have to touch a little bit upon tariffs. I just want to show you this meme for starters.

3:46Here we get it on the screen. My tariffs aren't working. Have you tried turning them on and off again? I mean, Andreas, we talked about last week, what was it going to take for us to be at the bottom? We talked about this. It could be a central bank intervention, the Fed intervening, or it could be a Trump U-turn. So it seems like over the past week, we had, was it two or three or four U-turns? Plenty to go around. What do you make of all this? So, you know, obviously we got the U-turn versus all non-Chinese countries basically on earth. We got that last Wednesday. And then we got kind of a sneaky U-turn late Friday on everything related to semiconductors, laptops, desktops, etc.

4:33Since I think the lobbyism from these big companies importing, for example, iPhones from China to the US was very efficient towards the end of last week. I think that's more or less safe to say, right? And by the end of the day, at least everything really important exported from China to the US is now exempt in tariffs. I know that they export apparel and stuff like that as well. And a lot of the stuff that you see in Walmart is from China as well, I think roughly 70 to 80 percent. But we're not talking, quote unquote, necessities to the same extent as these semis and laptops and iPhones, what have you.

5:18And then yesterday, Trump tweeted that nothing was off the hook and nothing was exempt, even though the actual press release from the White House on Friday was called clarification of exemptions. And Howard Ludwig then started talking about so-called sectorial tariffs upcoming over the next month or two after a review from the administration. So I'm actually not sure that they will leave out tariffs on iPhones in layman terms, but they'll have to investigate how to do it. So they're essentially just postponed as of now, in my opinion. Hi, Raoul here. Listen, I think we've got until 2030 before the economic singularity arrives.

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6:49To Trump's defense, everything that he sells in his own Trump store, all the merges that he tried to sell, that's made in China. All that seems to be in the high level of tariffs, but apparently not smartphones, etc. So yeah, U-turn on U-turn. What does this tell us, Andres, about this process? Can you really grasp anything and understand anything? How do you view this entire process? If you look at the market price action last week, very weak US dollar, aggressive attempts to sell US Treasury bonds into every close of the US session. We saw that Wednesday, Thursday, Friday, very aggressive price action in US Treasuries.

7:32And, you know, it's ultimately hard to prove at this juncture since we don't have live flow data. But my impression, having watched this price action, is that it's actually local institutions trying to force Trump's hand with dollar selling and U.S. Treasury selling simultaneously. It seems like there is some sort of a Trump put around 450 in the 10-year bond yield. We've seen U-turns when the bond market started shaking, basically. and using Trump's own words here, we had a little moment in the bond market and I fixed it. That was basically what he said late last week. You could argue that he traded the issue as well, but he ultimately also fixed it.

8:19That's fair by backtracking on some of these policies, right? So my point here is that the market is now at least partially in control of the US policy mix. The market is forcing Trump's hand here. And when you say that markets are in control on the policy mix here, does that mean that Scott Besant has taken the reign, as I suggest, you think? Yeah, I would assume that Scott Besant's phone was used a lot last week, let me put it like that. I think a lot of hedge funds, banks, CEOs, et cetera, called Scott Besant and told him that this was a really bad idea. And at the same time, we saw how market participants basically forced Scott Besant's hand and Trump's hand by selling U.S.

9:15treasuries in a very aggressive way. And, you know, when you see selling of the local currency paired with selling of the local bonds, the local sovereign bonds, we're talking about an emerging market like price action. You've seen that in the UK a couple of times since they ran out of fiscal capacity. You've obviously seen it in a range of emerging markets that you have a currency crisis and a bond crisis at the same time. But I don't think I've ever seen it in the dollar market during my professional career. It's extremely rare. And this is also slightly worrying, to be honest, because we're talking about the reserve currency of the world here.

9:57I think this chart is very, very telling. It's updated on Friday. And as you can see, we have bond yields and foreign exchange developments basically pointing in opposite directions. And as you can see very visually here, it basically never happens. So why has this dynamic shifted right now, Andres? This makes no sense to me. Have you ever wanted to trade Bitcoin but haven't dared try? With Plus500 Futures, you can trade crypto without the hassle of opening a wallet. With just a few clicks, you can register and start practicing with their free and unlimited demo. See a trading opportunity? You'll be able to trade it in just two clicks.

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11:12Not all applicants will qualify. Plus500. It's trading with a plus. I think this, you know, you can ultimately look at this as a credibility issue. Because if your currency is not gaining ground when bond yields increase, that's typically, you know, attracting FX inflows if you get a higher yield. Something is damn wrong. And I think this is related to, first of all, the flip-flopping that we've seen. on trade policies, but also, and this should not be neglected, the story around the Trump administration taking the first legal steps to force agency heads to report directly to Donald Trump, including potentially Jay Powell.

12:05You know, I'm not saying that there's a clear path for Trump to lay off Powell here, but just the mere fact that we're discussing whether that could be within the outcome space that Trump decides to forcefully act against the Federal Reserve, it's a part of what we saw last week. And it was a story that got a lot of traction towards the end of the week and obviously not good for the US credibility. No, no. Just to clarify on that, what's happening is that Trump is trying to fire a couple of heads, He's heads of independent agencies. He's not trying to fire Jay Powell yet, but there are people in similar positions and with similar layers of checks and balances when you want to replace them.

12:51I think it was the Labour Union Relations Council, whatever it was. Essentially, he's trying to get the Supreme Court to accept that the president has the power to replace these figures. And if he's allowed to fire them, then he's allowed to fire Jay Powell, which would be... Potentially, yes. potentially. That doesn't mean that he'll do it, but it opens up that entire playbook. So yeah, absolutely. Lots of risky interest. Another thing, Andreas, before we get further into the dollar here, the economic climate we're looking at here. This is a chart I saw of just the past eight weeks. What tariffs are you working under if you're producing phones or if you're importing phones, solar panel and video game consoles.

13:40This is just in a span of nine days here. So if you're an importer, if you're a producer, it's very, very hard to take decisions right now. How hard is that going to affect the growth in the US economy, I think, Andres? You know, I guess the jury is still out on that, right? Because one thing is to make a U-turn on tariffs. but we don't know whether the real economy is actually able to function under this kind of uncertainty and i think you know i i also included a chart on the u.s policy uncertainty basically measured in a quantitative way and we're talking uncertainty that at least matches what we saw back in march 2020 with with lockdowns and all of that which was you know in many ways the most uncertain environment seen in newer financial history, right?

14:32That month of March was absolutely crazy. But we've seen trends that feel kind of reminiscent of that. And I stress, if there's a logic to everything they're doing, it could be that they're trying to sort of nuke the inflation cycle by resetting the market in a sense here. That's the only thing that seems logical to me. But But other than that, it just seems like a big mess. And you can use this uncertainty index as a pretty decent gauge of live growth. So I think there is a negative impact quite clearly from this lack of certainty. if you're a phone producer or a producer of video games or whatever it is, you'll have to reassess your strategy every other day right now.

15:29And that's obviously not feasible. Then you'll stop making decisions and stop making major investments potentially. So, yeah. Yeah, and that's essentially why, Mikkel, we should probably expect this very low hiring environment to continue you because why would you hire a lot of people if you don't have a clue whether tariffs are 20 or 100 % in a month from now? You basically don't really know. And that's what I've said all along that I don't necessarily see tariffs as per se a bad idea over the long run. I understand that It's a clever way of taxing goods in an increasingly digitized economy. But you need some clarity on the direction of travel and the level.

16:16Otherwise, you cannot take any decisions. And I think what would have been the smart move here was to say to Apple, okay, we'll increase tariffs by 5 % every month or every quarter until 2030. tell them okay you need to bring this back over time and will continuously make it increasingly compelling for you as a case to move back but not this flip-flopping and these extreme moves from one day to the other it's simply impossible to make any clever decisions also because it seems like the bureaucracy the the port authority no one was really prepared for how to do this. So it seems like usually the textbook logic is that you introduce new tariffs, you get an inflation hike from that, and then that is absorbed by weaker growth in inflation terms.

17:08It's being absorbed. It seems like that's been reversed. So you have the weak growth now, but you haven't even gained any revenue from the tariffs yet. So I don't know what's going on here, Andreas. But that's the very interesting thing here, Miklu, because if you look back to March 2020, if we try to compare this shock from the tariff announcements to the shock from the lockdown announcements. What we saw back in the spring of 2020 was an initial drop in prices, actually, even though everything was under lockdown and the supply chains didn't work. And I actually think it's very likely that we'll see the same this time around because this is just a huge shock for the global supply chain.

17:50It's a huge shock on the demand side. And the initial response is actually to see lower inflation. We may have an inflation wave upcoming from these tariffs, depending on the levels. You don't really know that right now. But I don't think the first response is to see increased prices, rather the opposite. Last week, we had the inflation report on the consumer level and on the producer level, both way, way, way, way below expectations. And I think the two of us, Mikkel, we've been more or less the only ones worldwide highlighting this, that inflation actually did not increase through March. Rather, the opposite, it basically flatlined or maybe even decreased.

18:30And I think the same is happening so far in April in sharp contrast to what's the intuitive answer to all of this, because it just feels so intuitive. Okay, prices need to go up because of tariffs. It's the same response you get if you ask consumers, right? They think prices are up 10%, but they're not. So there's a perception and a reality on inflation here. And for now, they're actually getting inflation down, which is super interesting because it was one of their key goals, right? So they're actually getting that right, but they're just not harvesting any returns from it because of the uncertainty.

19:06No, no, and that's true for the eurozone as well, where you're having inflation even low enough to be getting a rate cut later this week. Andres, I just want to turn to a couple of listener questions here. First on the sell-off of T-bills last week. Has it been determined yet if it was Japan or not that sold T-bills last week before the auction? No, but it's true that we actually get some very nitty-gritty numbers from Japan, but with a time lag. So I cannot say yes or no to that question yet. The flow data is simply not known. I think it is feasible that Japan and China played a part in both weakening the dollar and selling US treasuries to some extent last week.

19:54I also think it is increasingly likely that a deal between the US and some of these Asian nations with huge trade surpluses versus the US will include what I typically label some sort of light dollar accord. I think it's one of the very few things that you can actually find common ground on between the US and China, a weaker dollar versus the Chinese yuan, because they need it in China to be able to stimulate locally. So they're well aware now that they need to find more consumers locally rather than globally in the tariff environment. But they're also very aware that they cannot do that as long as the currency is as weak as it is currently.

20:44So I think they can find some common ground in this foreign exchange question. And all roads lead to a weaker dollar right now. I think that's very important to underpin. all roads typically led to Rome, but they're leading to a weaker dollar right now. So let's just line up the reasons for that. So one thing is that China and the US, this may be where they find some common ground in these negotiations. It's very, very hard for us to tell what's going on behind closed doors here. What other signs do you see of further weakening to the dollar? Yeah, so, I mean, first of all, what you've seen, say, over the past couple of handful of years is a massive capital inflow to the US.

21:30You know, buying of MAC-7s and so on and so forth from large institutional investors, typically on a largely unhatched basis, basis, meaning that they buy a U.S. equity, but they do not hedge the foreign exchange risk between the U.S. dollar and, say, the euro or the Swedish crown or the Japanese yen or the Canadian dollar, et cetera. So a lot of these foreign investors have bought U.S. equities with a far from 100 % hedged FX risk. So if they start selling some of these U.S. assets, which we've actually seen severely signs of this year based on Trump's hostile negotiation tactics and all of that, they'll also have to sell some US dollars along the way.

22:14When they're selling their bonds or their equities in the US, they'll have to repatriate the cash to a local currency. And there's some dollars selling around that as well. So that's a very simple, practical reason why the dollar has weakened in recent months alongside this capital flight from the US, because we've actually seen some sort of a light capital flight from the US, which is the first time in a long while. On top of that, I think it will be a major surprise to everyone if the US inflation actually keeps declining into April and May here, which is so far what we see from life gauges.

22:53It will probably also allow the Fed Reserve to be more aggressive in easing than what's priced in. and we're seeing some meaningful mean reversion in the bond trade again today with lower bond yields in the US. So I actually think that both the Fed Reserve and other central banks globally can accept the weaker dollar here. So you're not really getting any firm pushback from any of the big central banks on this trade either. And then, ultimately, if there is just a tiny bit of merit to this story that Trump wants to increase his direct oversight of the Fed Reserve, you haven't sold the dollar enough in such a case.

23:40I mean, I cannot stress that enough. I think it's a super strong gold and Bitcoin case if that happens, because it's essentially the ultimate debasement trade in a sense when you start to intervene with the independence of the local central bank but those are two suggestions for positioning here andreas gold and and bitcoins what else are you looking at to to to leverage this this prospect of a further weakening of the dollar you know so what typically happens when the dollar weakens a lot is that growth actually rebounds around the globe six, nine months later. So it sounds like an awful story, but it's actually an okay story for the globe if the dollar weakens a lot.

24:26And that's also why I think there is some common ground to be found between the US and China on this topic, because both administrations are aware that a weaker dollar is actually preferable at this juncture. And that's one of the key things that we've been watching over the past couple of months, how a weaker dollar translates into a global pickup in liquidity, a global easing of financial conditions, and so on and so forth. So the dollar is a key component for global financial conditions. So I actually also think that this could lead to a rebound into May in risk assets in many ways, at least if we assume that tariffs do not rise again, may do whenever they conclude this new study on sectorial tariffs, because that still holds the potential to shock things.

25:22But for now, I think the analogy of March 2020 is pretty good, pretty solid here. We ultimately ended up with a rebound after that as well because it allowed for a global coordinated easing. And that's essentially where we're getting at now. Everyone's talking about how to ease the pressures coming from tariffs, whether that be the European Central Bank, whether that be the US authorities or the Chinese authorities. Everyone's kind of in the same boat on that topic, right? Okay, tariffs are bad. We'll have to ease to mitigate some of those issues. And maybe we'll end up with global coordinated easing as a consequence, right?

25:58Very interesting. Just two more questions, Andres, before we begin to round off the show and our trade ideas here. Sarah, expanding on what you just said, is asking, does the U.S. genuinely want to reduce dollar dominance globally, which could be, as you mentioned, a side effect from a weakening dollar? So wouldn't that weaken the position on the global stage of the U.S.? How do you view that? Because we've laughed off these theories that the U.S. was done and the yuan was going to take over as the global reserve currency. Yeah, the yuan is not going to take over. Let me just start by saying that if you want to be a global reserve currency, you need capital to flow in and out of the country without restrictions.

26:44You need a solid and liquid bond market. They don't accept either in China. They don't accept inflows and outflows on a free basis. The bond market is not liquid enough to support that story. So the yuan is off the table. The euro, we've heard that story before. There's a pretty decent bond market in Europe. Both the German, Italian, and French bond markets are decently liquid. And the size is okay-ish for a reserve currency. but nothing is traded in euros, commodities, you name it. So I ultimately think it's a bit too early to just say that the dollar is dead here. I think everyone, including China, would actually like to see a weaker dollar here.

27:29And the interesting thing is that when the dollar weakens, you typically see an accumulation of dollars from China, Japan, Europe, et cetera, because it's actually where, it's the kind of environment where you can accumulate dollars in a reserve. Because if the dollar is too strong, you need to offload dollars to combat that. While if the dollar is weak, you can accumulate a few dollars beneath the hood while the market is moving the dollar in a weaker direction. So I think ultimately everyone's kind of in the same boat here. We need a weaker dollar and we'll get a weaker dollar. Scott Besson is aware of this as well.

28:06I'm not sure that, I don't really know whether Trump is aware of this, but it doesn't really matter. The end game is that we'll get a weaker dollar out of this. I think it's just such a crystal clear trade right now, in my opinion. Okay, Andreas, a question here from Paul. You already touched a little bit on this. Any bullish opportunities in countries outside of the US right now? What do you have up your sleeve, Andreas? Okay, Mikkel, so I'll maybe also pass that question back to you at some point. But I think South Korea is still an interesting case since they're negotiating with the US. And it could be a country that you'll hand a good deal to try and put pressure on China, as we have that in the long-only portfolio.