Did Mnuchin signal a policy shift today? - BBH

"As Mnuchin and President Trump have done before, a distinction was drawn between short- and longer-term perspectives.  In the short-term, a weaker dollar says Mnuchin, is good for US trade and "other opportunities".  In the longer-term, Mnuchin explicitly acknowledged, "the strength of the dollar is a reflection of the strength of the US economy."," BBH analysts explain.

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The market chose to focus on the first part of the comment because it was already selling dollars and this offered justification at an important inflection point.  The dollar has strung together a 4-5 week slide despite macroeconomic conditions,  including strong growth, tax cuts, the relative and absolute increase in interest rates, and the anticipation of additional Fed tightening, usually associated with a stronger dollar.   

As we noted, the dollar has been falling persistently since the middle of December.  It looked as if there may have been a window of opportunity for it to stabilize this week.  The technical conditions were stretched, market positioning extreme, and the Bank of Japan and European Central Bank would likely push against speculation of a near-term change in their respective policies.   

Perhaps, concern about triggering the ire of the mercurial US administration, European and Japanese officials have been particularly circumspect in their remarks about their currencies strength.  The new head of the Eurogroup (eurozone finance ministers) Centeno did not express concern about the euro's strong appreciation. The ECB's Constancio's remarks were a bit more pointed but simply noted that premature tightening would jeopardize the inflation target.  Japan's Finance Minister Aso saw no problem with the dollar approaching JPY110 but sought a gradual adjustment.   

There is another reason that Mnuchin most likely did not announce a weak dollar policy today.  A week from now, the US Treasury will announce its quarterly refunding plans.  Mnuchin has previously acknowledged that there will be a substantial increase in Treasury issuance this year.  Last year's net sales were around $550 bln.  This year, net issuance is likely to be double that if not a bit more.  A third or so will be T-bills when the debt ceiling is eventually lifted.   

The increased supply meets unknown demand in the sense that the Federal Reserve will be buying progressively less as it does not re-invest the full amount of maturing paper.  In the first half, the Fed will not replace $150 bln and in the second half, it will not replace $270 bln.    

China and Japan, the two largest holders of US Treasuries, were net sellers in November, the latest TIC data showed.  As the dollar falls, other central banks in Asia appear to be inclined to buy Treasuries.  Europe seems cool to Treasuries.  Germany still offers negative yields out six years and France out four years, but investors seem to be more attracted to the periphery of Europe than the US bond market.  

The point is that it beggars belief that Mnuchin was talking the dollar down, introducing new currency risk, ahead of the quarterly refunding and a significant increase in the supply of Treasuries in the months ahead.  Understanding what Mnuchin really said will not stop the dollar from falling.  Many momentum players have their sights set on $1.25-$1.26 for the euro, $1.45 for sterling and JPY108.