Currency Wars

losses of the year. Then on Thursday, President Trump weighed in, putting more pressure on the Federal Reserve to take measures to weaken the US dollar. So why is everyone fixated on foreign exchange rates this week? And what exactly can Trump do about it? We've got some smart guests on the show to unpack it all for us, and then we'll close out the episode without tradition. The craziest thing I saw our markets this week, and Mike, I believe

that we've got now what goes Up hotline? Indeed we do, and that number again is six four six three to four three four nine. Oh, so please do give us a call and tell us the craziest thing you saw in markets this week, and if you have a question for the hosts of the show, uh drop it on our voicemail as well, and we may even play your voicemail on the podcast. But Emily, let's introduce the guests here. The first guest, now, this is a guy who started out in the pits in Chicago back in the nineties

making those crazy hand gestures. But he's had a variety of buying sell side market rolls over the last quarter century. He's a macro portfolio manager at Graham Capital in the US and Nylon Capital in London, but we're lucky now to have him here at Bloomberg. He's a market strategist, he's the author of the Macroman column, and he's a blogger for Bloomberg Markets Live Blog. Cameron Christ Welcome to the show. Always a pleasure. Also joining us this we

Katie Greifeld. She's a rising star reporter on the bonds and FX team here at Bloomberg. Katie, nice to have you, Thanks for having me and Katie, I wanted to start with you because obviously f X is the story of the week by far, and you've done some some very interesting reporting. Yet a Business Week story a couple of weeks ago, I just want to read the headline. Chaotic messaging makes it hard to decode Trump's dollar policy. I gotta say I think President Trump may have read that story,

because on Thursday then he tweeted this quote. As your president, one would think that I would be thrilled with our very strong dollar. I am not exclamation point. Yeah, he definitely answered the question for us, So we would have to tweak that headline if I wanted to write again today. But I kind of heard it from the horse's mouth there that he doesn't like this strong dollar. You know, that's echoing things we've heard before, but now we have

the added twist where he's starting to take action. I mean, he labeled China currency manipulator. That's why I wanted to ask, if you get the currency market. There wasn't a huge reaction to that tweet. Um. You've also reported about how there is a lot of speculation in the market that the US will intervene and try to weaken the dollar. What exactly can President Trump do to accomplish that, other than to continue to put pressure on the federal reserve. Well,

exactly that the US could intervene. I mean Trump complaining about the dollar strength, tweeting about it, you know, attacking the Federal Reserve. We've seen all of that. Now what markets are really waiting for is to see if you actually put some muscle behind that and directs Treasury to intervene, which would involve selling dollars to try to drive down

the price. It's like, Kelly, my question to that quickly is you've written before, I think that investors have every intention of trying to buy up the dollar if there is a sign of the US heading to an intervention. Is it even a realistic proposition right now for the

dollar weaken much on that basis? Probably not. I mean, that was one of the most fun stories I've written in the past few weeks, is that if the US did actually try to enter the market try to sell dollars, that would just create a great by the dip opportunity. Because the foreign exchange market trades over five trillion a day, so it's pretty huge, and the US and the Treasuries Exchange Stabilization Fund only has about ninety billion or something,

so that's a drop in the bucket. Uh, And especially when you compare that to the reserves of China they have over three trillion. Uh, there's just not a lot of firepower on the U. S side. O Cameron, if you were back in your seat as a trader, I don't think you're a fan of this type of tweeting by our president. Uh, you know, can you trade on this? Um? How do you sort of get through this type of environment where the president is sort of unprecedentedly trying to

force markets to to bend to his will. Well, it's yeah, I mean, it's the whole thing is broken. It's so depressing. It's like every day I come in and I've got a new rent about how the market. You know, markets don't clear anymore, they're not allowed to clear anymore because of politicians and central bankers and what have you. How do you trade it, Well, you don't really until they

demonstrate that there's actually an action behind the words. All it is is kind of empty rhetoric, and as we know, the President sort of likes to hold mutually incompatible views simultaneously. You know, this is the greatest economy ever, but it's being killed by the Fed because interest rates are too high,

the dollars too high, what have you. I mean, at least, at the very least you can say that the preference for a weaker dollar is consistent with his preference for narrowing the trade deficit with China, because I think, broadly speaking, it's fair to say that extreme currency strength or extreme currency weakness does lead to a decline or an improvement in export growth moving forward. Um, but let's face it again,

certainly against developed market currencies, dollars not doing anything. I mean, we've been in what seems like a three big figure range against the Euro all year, so kind of what's the what's the point? Trump's had a pop at Mario drug and unfairness. Druggy does like to play his own little games. But we're not going anywhere on that point though. I mean, when we're talking about invoking the FED and how we know that Trump has obviously bashed the Fed an awful lot, um, do you see this being a

sort of a counter productive effect. Do you think that it's possible. I've heard some people say, for instance, that you know Trump has actually possibly averted a deeper cut because of his attacks on the FED and the wish for the FED to stay independent. Well, the problem is we you know, we we never know the counterfactuals. Um. Certainly, the FED has changed course pretty dramatically this year from where they were at the end of last year, and

it has had a demonstrable impact on financial conditions. Obviously, yields have gone down, equities have gone up, and I think you could argued that that, in turn has given Trump a platform upon which to keep sort of re upping the trade war rhetoric. And I suppose there's an argument to be made that if the FED sort of didn't deliver what Trump wanted, which is easier montary conditions, than Trump wouldn't have the wherewithal to keep sort of tweeting every few months that he wants to put more

tariffs on China. So it's it's you know, it's it's it's it's a very difficult environment in which to operate because there's so many political levers that are that are being pulled, and it's not an easy thing to necessarily predict when the President is going to come out with some six pm tweet that now sends your beautiful trade down in you know, in flame. So you're really missing

being a trader right now. I take it. Well, Um, I mean, I sleep a heck of a lot better than I would if I still run a portfolio, that's for sure. Katie. You also had an interesting story recently that you helped report. Um. Obviously, a lot of people sort of we're maybe not expecting, but speculating, worrying that China would take a step like this with its currency, and the other shoe that people are waiting to drop is uh, China's holdings of US treasuries. Tell us about

that story. Are people worried that China could eventually unload its massive pile of treasuries? Would that backfire on them if they did? Um? You know, they call it the nuclear option, mutual assured destruction. What is sort of the thinking about that issue from the people you talked to, Well,

it's definitely still seen as that nuclear option. It would hurt a lot for both sides, maybe more for China because uh, you know, if they sold a whole bunch of their treasuries holdings, that would sort of erode the value of whatever they had over But I mean talking to people on Monday after you know, we got in and saw that you wanted really screamed through seven the people we were speaking to said, if they let that happen, if they decided to stop holding the line at seven,

you really can't rule out the treasuries option because I mean, there's a lot of pain that could come with a big devaluation in the currency. And uh, clearlyly there there was some calculus that they were willing to withstand that pain. So that's what people were applying that same logic to that huge pile of treasuries. It would still hurt, but it would send a pretty big message to the U

S too. So, Katie, the trends that we've seen in terms of treasury auctions recently, there's been Uh, I know that you've been following a little bit of kind of the TIC data and that sort of stuff as well. Um, how can we sort of draw a line between China's behavior and actually buying versus holding treasuries. I mean, it does seem as if they've stepped back from auctions a little bit. That seems to be the theory, although it's hard to trace. What what kind of clarity do we

have on that? Well, we spoke to Sebastian Gallle at NORDAIA and he said he will be watching the US treasury auctions for any signs of back. Of course, it's a little murky there because China can bid directly indirectly. But I mean, even with that in mind, if you just look at the bid for treasuries over the past week, clearly there's been demand. Maybe it's not from China, but people are really looking to scoop up treasuries here, Cameroon, let's bring you in on sort of both of the

things Katie was just talking about. You know, A, is this nuclear option science fiction? Uh? And be talk about that level of seven you want to the US dollar? Um? Was it actually that sort of magic number being crossed or was it more basically that big rate of change in the weakening that we saw on Monday that sort of spooked out the rest of the markets? Well, the treasury sales stories nonsense, um. And people have been talking

about this sort of thing happening for a dozen years. UM. We do have a little evidence of it happening in the past with Russia, who basically completely pulled out of the US fixed income market um, and really ran down their holdings of treasuries a couple of years when they had some sanctions apply to them. But the thing is that China's stock of treasuries is so big there's literally

nowhere else they can put it. Okay, they can't put it in European fixed income A because the Payson negative yield and be because there's just not enough bonds for them to buy. So where are they going to put the dough? Are they gonna you know, get one of their diggers there that they're using to dig holes, uh for for infrastructure and just put a trillion dollars in a hole and hire some guys, you know, hire some

guys to to guard it. Now, of course not well, but yeah, but say hypothetically they didn't unload it all at once, they sold a couple hundred billion, you know, big block trade one day at at a market. Would uh, you know, wouldn't that be enough to sort of get Donald Trump's attention? I mean, yeah, I theoretically, I suppose. But if it also were to submarine the value of their existing holdings, and let's fay, I mean, let's let's remember that a lot of these holdings are kind of

they're trying to make some money off of it. Uh, you know, it's kind of cutting off your nose to despite your face a little bit in terms of seven of you want. Yeah, I mean it's a it was a big psychological level. I mean, people in the West, we all like to think of the function and all the sort of the mystical Chinese cultural things, but apparently eight is the real mystical number. Seven seven seven doesn't really hold much numerological allure, so there's no sort of

hidden messages there. Um. Yeah, they did defend that level. Well, it's not so so much defending it as they just didn't you know, they didn't put the fix close enough to it that, um, the freely traded market would would push through it. That's obviously change, and it is a rational response to the tariff threat. The way that China can offset some of the impact of tariffs is to make the currency, um, make the currency more competitive, and if it comes in a context where it's not so

severe that encourages capital flight. Um. Then for their perspective, it's a it's sort of a winning strategy. And you know, ask for the United States labeling them a currency manipulator. It's kind of like you've seen the movie Team America where Hans Blix is there in North Korea and he said we're very angry with you, and we're gonna write you an angry letter that essentially all that it entails is the US from Tea America. This is a family podcast. Uh,

you know, it's essentially wagons. It's an angry wagging, an angry finger, um and and and nothing else. Um. But what is interesting actually is that the one has not only fixed too in sort of a new low against the dollar, but on his broad basket, and that has impact throughout the rest of the world. And we've already seen this week some of this impact materialized with sort of surprising rape cuts in a number of central banks

in in the Asian region. The Kiwis did fifty instead of the expected rb I, preserved Bankiviny at thirty five by the expected, and Bank of Thailand out of sort of thin air that no one expected. So it's, you know, unfortunately, going back to the original question, Mike, we are kind of seeing the shots fired in a currency war. And the problem is is that if everyone cuts rates to weaken their currency, when you know, we're not on the gold standard, the whole world can't devalue against sort of

a central peg. If everybody wants a weaker currency and cuts rates to deliver it. All you're gonna end up is essentially right back where you started on a relative basis, except with less ammunition in terms of conventional rate cuts to fight against the next global recession. So it's it's a pretty stupid policy in my opinion, just if we can backtrack to slightly, because I think this currency manipulator

label is is interesting just from a political standpoint. Clearly the criteria aren't quite there right now, nowhere near there. So does this leave us in a really strange position where the government is now in the US is now kind of faced with a year of testing and and you know, thinking about whether or not this is a viable thing. What is the actual practical implication If it's possible that they're not going to be found to be a currency manipulator, what's the what's the upshot of Well,

they they were found. Obviously I don't have insight information, but I'm strongly suspect that the state of play was that Donald Trump called up Steve Manusian and said, we're calling the most currency manipulator. And that was that because certainly on the basis of the criteria that the Treasury

has been using in their semi annual report China. The level of intervention that China conduct which has basically been zero over the last several years on a net basis, is nowhere near where it needs to be, which I think is two percent of gdp UM to be called a currency manipulator. So I think Trump had tweeted out earlier that day that China was manipulating its currency isn't as awful, and I think he just rang up monutions said alright, bang, let's yeah, let's do it. Let's do

this thing. Um. In terms of the practical implications, as I said, it's kind of just writing an angry letter of waving of finger and in in in disgust. The literal interpretation of the law is that they are supposed to consult with the I m F and with China hold talks about fixing this bilateral misalignment. But as we know, China and the United States are already engaged in sporadic trade talks of which the currency is one of the

one of the issues. I don't think anyone expects Donald Trump to call him the I m F to adjudicate a dispute, because he's a master negotiator. So other than let's said about that the better, but but other than a diplomatic sort of chip that's now been kind of handed those. Yeah, that's the thing. Yeah, that the I and it is that it's now been played. And insofar as China was worried about weakening the currency so they could, you know, because I didn't want to be called a manipulator,

Well now they've been called a manipulator. So what's to stop them from weakening the currency even further? There really isn't it. I wanted to get back to something you mentioned earlier, which was these shock rate cuts we saw this week. Well maybe not shocked, but India, Thailand, New Zealand all cut a little bit more than what the markets were expecting. We saw this uh, ferocious rally in

bonds the world over in the wake of that. Now we're having people openly discussed and with a straight face, seriously, the idea of negative treasury yields in the US. You know, I know you've written before. Eventually people are going to just dig a hole and put their money in a hole. I mean, is there a real risk of sort of a major banking crisis if that, if if rates are to get too low, and especially say deposit rates on on savings accounts get deeply negative. I mean, how do

you see this all going? If people predicting negative rates in the US are correct, well, I mean, we're all gonna have to find new jobs because frankly, there won't be very many Bloomberg terminal silver because a lot of a lot of people in our industry will be out of work. Um, the US is a very highly financialized economy. The money mark in industry by itself still runs three

trillion dollars. If you basically impose negative yields at the short end of the curve, and that's the only place that these money market funds can operate, then why would I pay somebody you know a dollar today to get cents back in a year's time because he might get less otherwise? Well, no, I'll dig a hole. I mean literally, I'll buy a safe and dig a hole in the ground. Um, it's uh, let me, let me, Let me ask you

guys a question. Let's turn the tables around. You make the okay, all right, So let's say, Um, we're just gonna I'm not I don't know what your wealth aspirations are. But let's say that you wanted to have a million dollars in twenty years. Whatever your income is. UH, say you make a hunder grand a year, and you've got whatever, kids and mortgages and all body body bob um and you. So you save a little bit every every you know, every month. You want to have a million dollars in

twenty years time. If interest rates are five percent, consider how much money you would have to save every month for twenty years to get that million dollars. Now, consider how much you have to save if rates were minus one. Would you save more or would you save less? Would

you spend more? Would you spend less? I would argue very strongly that you would spend less and save more because you aren't gonna get capital returns, or you're not gonna get returns interest returns um from that you would have had if you if ray where I say five um. So I think this idea that negative rates are going to sort of spur consumption and reflate the economy. There's been no empirical evidence that's happened in Japan. There's been

no empirical evidence that's happened in Switzerland. There's been no empirical evidence that's happened in Europe. So the idea that it's somehow a good idea in the United States it's frankly absurd. Look at the banks in Europe, look at the banks in Japan, and look at the banks in the United States. One of these things is not like the other. Uh. The U S banks have done demonstrably better than banks in other parts of the world. I've

had negative interest rates. Ask yourself why. Well, on that note, I think it's time to talk about the craziest things we've all seen this week in markets, and I'm gonna start with a call we got into the hotline from a character on Twitter known as Twiggy Sunday. Let's listen to what he believed to be the craziest thing he saw in markets this week, because I got amit. It's

pretty goo. The tip of the hat goes to Tracy Alloway, who quoted at Quantaine stating that the biggest TTF in the world, s p Y, is organized around a secret list of eleven individuals age to twenty nine, and upon their death, the trust will be forced to delist liquid date and distributed its assets. I have no idea whether this is true. But if it's my definition of bonkers, that really does fit a definition of bonkers, I have to agree with Twiggy on that, and he's wondering if

it's true and in fact is true. I asked our et F guru here, Eric Valcunas, about this, and he said, it is technically true with a lot of E T F s um, but it has to do with some arcane nuances of securities laws. But let me just read you the documents here. The trust is scheduled to terminate on the first to occur of a January or b the date twenty years after the death of the last survivor of eleven persons named in the trust agreement, the oldest of whom was born in nineteen ninety and the

youngest of whom was born in ninete. So I imagine they'll fix that when eighteen were the death of those people approaches. But I don't think anyone knows who these people are. It's a very very bizarre thing in the weeds of the spy, the biggest et F in the land. Um, So good work Twiggy Sunday on that anyway, kemeron that one's gonna be hard to top. But let's hear what you've seen this week. What's the craziest thing you've seen this week? Oh man, I'm in I'm sorry, this is boring.

I mean, twenty year Danish mortgage bonds offering a negative yield, you know, issued in a negative yield um. The yield on the European UM investment Grade Aggregate index went negative. And that's the next that includes yes, government bonds, but also investment grade corporate bonds. If you look at the list, I looked at the stuff. Every single bond in the European corporate universe, there's like hundred bonds more than the

thousand of them have negative yields. It's I mean, it's not even it's not even Wonderland or Oz because uh that those those countries are too normal for the for what's going on here. I'm not, and I know it's not exactly new, but it's just it's just every every day I come in and I feel like I've dropped an anvil in my foot. You'll get desensitized the anvil. Though, I got to say, the Danish mortgage bonds, I don't think I would ever have guessed that mortgage bonds, mortgage

bonds would would go next. Now I did get I wrote something about this, and I did get feedback from a Danish reader who said that the mortgages themselves I was gonna, I was wondering, are the effective right? And the mortgages themselves are not zero or negative because there's a fee here and h you know, um punitive little thing there. So it still makes sense for the banks

to issue these these these bonds at negative yield. Uh. And they're getting snapped up by European and Japanese investors because you know, I can get zero here minus five days was point here versus minus eighty there? Well minus five Emily, can you top negative yielding Danish mortgage bond? I can't even say it, Danish, Katie, can you say Danish seven times? I feel like I'm the Swedish chef? Oh that would be great? Um well, funny enough, mine

also has a negative flavor. But this one is just about this bump that the German tenure bunt yield got. And this was from some sort of a misleading headline that was saying the government was considering raising more debt, which it obviously does very little love um to fund efforts to tackle climate change, and so the tenure went from negative fifty eight basis points to negative fifty three. And that kind of begs the question that if you could do it for that, why wouldn't you then start

raising some money. And that's right, Why if you can raise money and get paid for it, why not I agree, and I would put out that headline I think said the government in Germany was mulling something. I you know, I hate. I don't think we're allowed to give trading advice, but personally I would never trade on any story about someone mulling anything. Yeah, that's that's the word to the wise. The other the other quick one that I have is

UM is an interesting headline based one as well. UM that there was a story out from this zero hedge UM saying that they had been contacted urgently like this was in the subject line by a FED researcher who was looking for a piece of analysis as a cell side analysis that they quoted in a story earlier that day. And the analysis was on the possibility of the FED needing to launch QUI as soon as the fourth quarter

to show up liquidity in the market. And so this caused a bit of a stir and they said, you know, actually, probably if the fit needs to find sell side analysis, they can find it somewhere out of Okay, not bad, Katie. What do you have first? So I'm going to take us on a bit of a tangent, but I'm going to bring it back to market. So just buckle up. So this is a story that's near and dear to my heart since I grew up in Westfield, New Jersey.

Oh yeah, but there's this great article Thursday on the terminal and the headline is NJ couple spooked by watcher. So one point four million home at loss. Oh I know the watcher. Do you know who he is? No one knows who he is, But go on, go on, I want to hear your So in this idyllic neighborhood

in Westfield, this there's this beautiful house. It looks to be yellow, and the family bought the home in and has just been getting creepy, spooky letters from a man who calls I assume it's a man I shouldn't by someone who calls himself the watcher, talking about the couple's kids, how he's just been watching them. As you can tell from the name, and they tried to sue the previous homeowners.

Since the Watchers followed the house around, they apparently got letters as well, and the lawsuit was dismissed and they had to sell the home. They never moved in, and they sold it for less than a million dollars after buying it at one point four million five years ago. So they knocked off half a million dollars off the price. They sure did. I suspect whoever bid on that house

is the Watchers. Yeah, this email them. But so my point is, if that's all it takes to knock half a million dollars off the houses price, I don't think that's pretty bad for the real estate market. It's that easy to drive down the value. And if you're worried bonds are ever priced, maybe send some spooky letters to the Treasury Department. You never know. It's kind of a Scooby Doo kind of plot, right, Yeah, get away with

that one. You guys should read about it though, because, um, you know, if you look at the court filing, you can see the letters themselves, and they're they're pretty it is. It's an amazing story that New York Magazine had a story I think three or four years ago about it, so so google that it's a crazy story. These crazy things are all very hard to top. I'm not even going to attempt a crazy thing this week. I'll be back next week with my craziest things maybe of the

last two weeks. I will also point out Emily that Sarah pon Zac, my co host who you're filling in for, is on vacation this week. She actually called the hotline to offer the craziest thing she's seen on vacation. It was We're going to play it, but I think it's a scheme for her to put her whole vacation on her expense account, so we better not play it. But we'll see Sarah next week, and uh we hope to

see you all next week as well. Katie Gray felt can Christ thanks for joining the show, Thanks for having me and Emily, thanks for co hosting. Oh thanks having what Goes Up. Will be back next week. Until then, you can find us on the Bloomberg Terminal, website and app where wherever you get your podcasts. We'd love it if you took the time to rate us and review the show on Apple Podcasts so more listeners can find us.

And you can find us on Twitter follow me at reag Anonymous, Emily Barrett is at Not That ECB, Cameron christ is at Fifth Rule, and Katie Greifeld is at k Greifeld. You can also follow Bloomberg Podcasts at at podcasts and that hotline number again is six or six three to four three f nine Oh. What Goes Up is produced by topur Foreheads. The head of Bloomberg Podcasts is Francesco Levy. Thanks for listening. I hope to see you next time. Hey guys, it's there upon Zack. I'm

trying to reach What goes Up. I figure since I'm a way on vacation, maybe I would shay the craziest thing I've seen while here. So I'm up in the Canadian rockies and our first I was going to say the lakes, because they're all crazy blue and pretty much glow when you look at them. But then I was actually thinking, as we were driving along one of the roads, we actually saw a couple of black bears, and that

wasn't the crazy part. The crazy part was that there were some families actually getting out of their cars holding their kids and their babies next to them, standing about five ten feet away from the Bears. So that was pretty crazy, maybe a little bit dangerous. Um, But I know I'm missing a pretty crazy week back in markets as well, and President Trump about field curve, so I'm sure when i'm back next week's games will be just it's crazy. You have a good show.