A range bound Dollar is more likely

Bullish US$ capped at 93-95 DXY

·         US vaccine distribution has surpassed every modernized nation (except the UK)

·         US Fed/Treasury actions would want to limit the perception of failing dollar

·         US Fed/Treasury actions to improve its purchasing power in order to combat commodity inflation 

·         EU banking sector insolvency issues

·         EU manufactures lockdown/political upheaval to lower euro

·         Fed distraction with bonds/rates to worry about rising dollar

·         Weaponization of the dollar to politically stress adversaries (Turkey, Russia, China, etc)

·         Dollar shortage within the EU and China, forcing sales of USTs to raise reserves

·         US military engagement in conflict zones

·         Geopolitical issues disrupt supply chains

Bearish US$ limited to 87-90 DXY

·         Fed buys euros to lower dollar, boost asset markets

·         Dollar weakened due to US domestic political upheaval, progressive policies

·         Lower dollar wanted to boost exports

·         Congress raises taxes, capital flees

·         Lockdowns re-emerge as Democrats wish to hide an underperforming economy

·         Multiple stimulus programs next 18 months

·         Implementation of MMT style programmes by progressive initiatives 

We expect the dollar to be sideways choppy, but remain within the above upper and lower bounds until a catalyst, such as a geopolitical supply chain conflict (US$ positive), EU banking sector collapse (US$ positive) or Biden resignation (US$ negative) would tip the Dollar aggressively one way or the other.

Beltway insiders suggest that the Biden administration is run by a modern US version of the Politburo, rather than Biden himself, and that this will persist until such time as Biden is incapable of carrying on. As such, there is a desire to get as much radical legislation passed as soon as possible. Hence the following proposals, which will be very difficult to enact:

·         The Biden Tax plan

The complexity of proposed tax law changes will likely limit the prospects of such a large and radical piece of legislation gaining enough support.

·         The Infrastructure plan

Tis huge infrastructure bill (which we refer to as the Green Gosplan) will absolutely need bipartisanship to have any chance of passing Congress, since it would not qualify for the budget reconciliation process used for the recent stimulus package.

So, there is a real chance that neither of the above gets passed into legislation, which would consequently lower expected  economic growth forecasts for at least 2022.  Should this happen, look for the Democrats to become desperate for good PR and try for smaller, targeted MMT-style programmes to maintain voter support, especially ahead of next year’s midterms. In terms of such programmes, remember that Jay Powell’s term as Fed Governor expires February of next year – could he be replaced by somebody more progressive? If they need to, then absolutely.

Where does that leave the dollar? Well, likely in a DXY range of 93-95 on the upside, 87-90 on the downside. It seems that the Fed meanwhile is quite happy at around 91-92, from which they can move in either direction if needs be ahead of the midterms (inflation getting too hot, or conversely the economy needing an export boost). However, ceteris paribus, there is right now too much financial and political instability to expect the dollar to break down to the mid- to low 80s.