Three months ago we asked one question which in retrospect has been extremely important: with Trump's approval rating at 11-month highs, would the dollar - which has shown an uncanny correlation to Trump's public support - follow? This is what we said at the end of March:
Vivian BalakrishnanThe last few days have seen a rapid rush to the 'safe-haven' dollar, stalling a seemingly non-stop drop in the world's reserve currency. Which raises the question, is the correlation between President Trump's approval rating and 'king dollar' about to reignite?
In retrospect the answer was very clearly yes, as the past two months have seen one of the most torrid jumps in the value of the USD, catalyzed by the PBOC RRR-cut on April 17, one which has since led to a "surprise" recoupling between the dollar and spread differentials.
This curious correlation between the greenback and Trump's approval rating, which we first noted over a year earlier, prompted Deutsche Bank to comment on what may lie in wait for the dollar. As Deutsche macro strategist Alan Riskin writes overnight, while he is "wary that the relationship may be at least partly spurious" the US dollar (DXY) has shown a notable correlation with President Trump's Real Clear Politics approval rating, "albeit the currency lagging the President's approvals by 45 days." In our charts we use a 30 day lag, but you get the idea.
Continuing, Rusking writes that he does not suggest that there is a direct causal link, whereby the FX market is directly trading off the President's approval rating - as that would be tinfoily even if ultimately quite correct and profitable - "what may be at play is that there is a common factor that is helping support both the President's approval rating and with a lag the US dollar. One obvious element, may be that the recent strength of the economy, that appears to have been helped along by recent fiscal actions, and is supporting both the President's ratings, and, belatedly and with a lag, has helped the USD via greater confidence in growth and continued Fed tightening."
There is another possible explanation:
the US Administration appeared to be talking the USD down more actively when the President's approval ratings were weaker, and more recently the President and his team have concentrated on other issues, perhaps because they have greater confidence that the economy does not need a weaker USD to add to the considerable policy stimulus coming on stream.
Whatever the reason, the correlation is unmistakable....
... and as Rukin adds, the President's approval ratings have improved even more in recent weeks, "and if the relationship and lead/lags still work, bodes well for some further moderate DXY gains." Still...
Note that the very high beta DXY response to the approval ratings, would strongly suggest the relationship will almost regardless weaken over time.
The other reason why Ruskin is somewhat cautious:
After all it would only need a Presidential approval rating above 47% for the DXY to hit a cycle high!
Of course, if the DXY does hit cycle highs, we would have a raging EM crisis on our hands, so maybe it's time to feel less supportive of the president for a change, for the sake of the emerging world...