Even as overall volatility remains tame, things are rapidly changing in the world of currency trading where FX vol has spiked to the highest level since early October after this week’s dramatic FX rollercoaster which saw the US Treasury Secretary get this close to launching currency war, and required the verbal intervention of both (a rather angry) Mario Draghi and Donald Trump himself to normalize things, if only for the time being.

While some were quick to point out that what Mnuchin did with his “weak dollar” commentary was a dramatic reversal of decades of US “strong dollar” policy (which is nothing more than lip service as Hank Paulson showed so very well when he launched QE1 in 2008), others such as FX strategist Alan Ruskin saw a more innocuous explanation: as we noted earlier, he suggested that what you have here “is two officials who like a weak(er) USD in the short-term that will help the US trade accounts and support growth, albeit to the point where strong growth will eventually support a strong USD longer-term.”

In Alan’s view this is a way of saying that in the short-term a weak USD is good for US trade, and in the long-term a strong USD is good because it is indicative of strong growth a healthy economy. Still, Ruskin concedes that that this is clearly a very confusing message to convey and it’s unlikely to either be reported or understood correctly, which doesn’t really help the message.

And then there is the less subtle explanation: that trade wars have indeed broken out. That’s the assumption used by DB’s Masao Muraki, who today writes that it his view that the Trump Administration, having completed the tax reforms, will shift focus to trade policy.

 

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