Dollar Will Suffer From US Shutdown: 3-Minute MLIV

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Transcript

00:00for three minutes on the markets. Mark, good morning to you. So let's start with the impact

00:05of shutdown and in particular on the US dollar. I see Citi talking about how this is something

00:09that's going to weigh on the dollar. And I think from reading your notes, you think that that's a

00:12sort of path of least resistance for the dollar right now. Absolutely. I think that's probably

00:18the easiest way to kind of play this kind of theme. I think overall, what government shutdown

00:25means is not major economic impact unless it extends. And obviously, we don't know how long

00:29it extends until we see it play out. The assumption is it'll only last a short period of time

00:34and then we'll move on from it, which means that the underlying trends continue because

00:39we generally get not only kind of a delay of some data, but we get suspicion of the data

00:45that we do get. So that would mean positive for equities, probably a little bit negative

00:49for bonds, which counteracts the positive for equities. Therefore, they're kind of volatile

00:55but go nowhere. You keep the same trends. The one thing it probably does help, though,

00:59is dollar weakness. Now, it's interesting here in this context that last week we expected

01:04a dollar bid at the end of the week in terms of month end corporate rebalancing flow.

01:09FX is a T plus two markets. The main day for that buying was going into the Friday fixes.

01:14We saw that flow into last week and immediately then the dollar weakened again this week, which

01:18shows the underlying bias there is still to slowly reduce those long term exposures to the

01:24dollar. And I think that is the path of least resistance is a slightly weaker dollar

01:27over the coming days and weeks. Mark, do you think there's a risk to markets that they put

01:32too much emphasis on the ADP number this week? You know, in the absence of jobless claims and NFP

01:39that perhaps the direction of the Fed is set by ADP. Does that concern you?

01:46I think you're absolutely right that to suggest that there's a risk that we'll get, you know,

01:51a little bit of an overreaction to the data points that we will get. It's all that people can work off.

01:56And we're going to have a little bit of people hesitancy about how to react. And then we're

02:00going to have other people who don't normally look at these data as much suddenly focusing much

02:04more. You have a lot of the market who just kind of wait for the NFP. That's what got into their

02:08models. And suddenly they're going to go, oh, we don't have that. We better, you know, put too much

02:12weight on ADP. So, yes, there's probably a chance for overreaction the short term. I expect more

02:17very kind of short term interim volatility as a result during the shutdown period. But I don't think it

02:22goes into new trends. Mark, earlier this month, we hit an intraday low of 398 on the U.S. 10-year.

02:30From here, how low do yields go?

02:36I don't think they go any lower than that again. I'm going to remind of the important context here,

02:41Critty, that I got U.S. yields wrong over the last couple of months. I was the person who,

02:45having been bullish treasuries earlier this year, turned bearish early August, which was clearly

02:49poor timing because then they had a nice rally after that. You know, I think that now the Fed

02:54is out of the way. I don't see any particular reason for treasuries to strengthen massively.

02:58Now, of course, you're going to say, but doesn't shutdown mean treasury buying? Absolutely in the

03:02short term. So we'll get yields maybe drift a little bit lower in concern. Do they break 3.98?

03:07I'm not convinced. I probably see more topside risk than downside risk in yields.