What goes up…
DXY has recaptured support, and how.
Houston, we have a problem.
CNY still supportive. JPY not so much.
As I have warned many times, gold is volatile.
AI metals meltdown.
Massive mining reversal.
EM too.
Junk is alseep in a chair.
Curve steepened.
Stocks fell.
What gives? Kevin Warsh will succeed Jay Powell as Fed chair.
Warsh is not a radical, but his ideas can be twisted to fit the Trump agenda.
Reputedly a ‘hard money’ guy, he has campaigned for cutting the Fed’s balance sheet to reduce inflation while cutting the cash rate as well.
In theory, this moves easier money from Wall St. to Main St., which is no bad thing.
Warsh has also recently made a lot of the AI revolution and its productivity effects, arguing that there is no trade-off between inflation and low unemployment while productivity booms.
None of this is especially radical, but it does make several assumptions:
- The AI boom is a productivity boom.
- Shrinking the Fed balance sheet won’t disrupt banking funding spreads or Treasury yields.
- This won’t materially dent grossly overvalued financial assets and the K-shaped economy.
What has shocked the market is that it just got poked in its one-eyed view of DXY debasement, which has been driving EM and precious metals mad.
Hence, the rocketing DXY, which has been crushed by the machines running wildly to one side of the boat.
. 
So, did I call the top of the AUD rally last week by upgrading my forecasts?
Maybe, but I’m cautious about that conclusion. As I noted, AUD was wildly overbought and would pull back regardless of what happened next.
Also, no new Fed governor will make a huge difference immediately, even if the prospect of rate cuts has to firm up under a Warsh Fed.
CNY is still likely to grind higher, and the fiscal story in Japan and Europe is intact, if problematic.
It appears DXY is going to unwind some excesses here and probably be less febrile afterwards, which will slow the AUD’s ascent.
But we need to see another leg kicked out from under AUD to confirm a top, such as the RBA turning sensible and holding the cash rate.
And over everything still looms the American madman whose Katherine Wheel policy decisions will undermine US credibility again before very long.
With Warsh, he’s hit Noon on a stopped clock.
Tomorrow it could be nuking Tehran.
