Steve Englander, Head of G10 FX and North America Macro Strategy, Standard Chartered

[00:00:01] Hello, this is Dean Curnutt and welcome to the Alpha Exchange, where we explore topics in financial markets associated with managing risk, generating return, and the deployment of capital in the alternative investment industry.

[00:00:19] Market risk events come in all shapes and sizes, originating from unique sources of uncertainty. We've seen them all. Valuation bubble unwinds, mortgage credit crashes, Fed policy shocks, even the shutdown of the U.S. economy from COVID. Over the last month, investors have been forced to confront a new risk, that of the imposition of substantial tariffs by the U.S. on its trading partners.

[00:00:43] With this in mind, it was great to welcome Stephen Englander, Global Head of G10 FX Research of Standard and Chartered Bank, back to the Alpha Exchange. Our discussion begins with Stephen's assessment of the setup coming into 2025, and that was one in which the market was long dollars in anticipation of the Trump agenda.

[00:01:02] We next talk about balance of payments identity math and how it's difficult to solve simultaneously for a lower trade deficit, higher direct investment from abroad, and lower U.S. interest rates. He suggests, however, that the speed with which asset prices moved in March and April have complicated the decision-making process for investors thinking about making investments into the U.S. We next explore the factors driving the dollar lower.

[00:01:28] Here, in addition to noting that implied Fed cuts have increased by 50 basis points over the last month, Stephen also suggests that a risk premium may be assigned by foreign investors to U.S. assets. He points as well to pessimism about the U.S. economy, noting that this is not yet showing up in the hard data. There's much more to learn about Stephen's framework in our discussion, which I do hope you enjoy. My guest today on the Alpha Exchange is Stephen Englander.

[00:01:57] He is the head of G10 FX Research at Standard Chartered Bank and someone who knows his way around the global world of currency markets. And I'm sure his phone is ringing off the hook. So, Stephen, it's great to welcome you back to the Alpha Exchange. It's always a pleasure to be with you. And as you mentioned earlier, in times of crises, it's, you know, even more fun.

[00:02:23] Well, you and I, just before we jumped on, we were sort of debating whether we could call this a crisis event. And it's sort of like a market correction where they say, you know, that's a 10 percent or a recession is two negative GDP quarters in a row. We don't really know what a crisis is, but we know that things are unruly. And a lot of it is really central to the obviously the tariff question and the FX market.

[00:02:50] So we're going to have a lot to dig in here, too. So why don't we get the conversation started with a little bit of the backdrop, the back story, as it were. You know, we are coming off a kind of a lengthy period of the Fed raising rates. Probably more than the rest of the world could stomach, at least, you know, during parts of 2022 that settled down a little bit.

[00:03:17] August 5th of 2024, we had this giant kind of yen carry trade online that made its way into the VIX for a short period of time. And then we had a change of leadership in the United States. You know, Donald Trump won. And at least the immediacy of the reaction was stocks up, bond yields up, dollar up, VIX down. And it's kind of the same thing that happened when he won in 2016. So take us from that period on. People were excited about the Trump agenda.

[00:03:47] You know, tariffs were mentioned. But maybe start us sort of at the beginning of the year. What's the setup in global FX markets positioning wise, you know, expectations wise as we started 2025? Well, the market kind of set itself up, I think. And I'd say I'm such a slow reader. I'm still reading all the papers and notes I received on U.S. exceptionalism in the first six weeks or two months of the year.

[00:04:17] And, you know, just getting to the U.S. and exceptionalism pieces. But the market came in with this view that there'd be some tariffs, that the U.S. was in the driver's seat, that there was a plan and that the plan was kind of going to be executed. You know, everyone was long dollars, I think, as we came in.

[00:04:40] Kind of short, fixed income because they thought that both the inflation from the tariffs, but the growth that they were going to see was going to be strong. And it was going to play out and, you know, help the U.S. economy. I guess, you know, they were looking at the tax cuts that are still to come. So it was set up for a very positive U.S.-centric outlook. The rest of the world looked a little bit soggy and, you know, more than that, kind of dismal.

[00:05:10] You know, I think what happened is that the emphasis on tariffs was an order of magnitude more than the market expected it to be. The implementation of the tariffs was more disorganized than the market expected it to be. And I think that they'd come in saying, OK, they've been planning this for four years. There's a blueprint here for how they're going to do it.

[00:05:35] You know, the realization struck or the possibility struck that there was no blueprint, that one day you revoke the China de minimis status. The next day you realize that you have no way of collecting tariffs on those goods. You know, you sort of start tariffing, you know, USMCA goods crossing the Canadian and Mexican border multiple times.

[00:06:02] But there's not a process by which you can only tariff the value added that's being added in Canada or Mexico because there were no tariffs before that. And gradually, I think the market began to worry that there was no real plan. And I think that that's kind of the stage that we're at right now. And, you know, the Trump administration is doubling down and, you know, maybe they're going to win and surprise us all.

[00:06:28] But I think the market has has a lot less confidence in them now than they had two months ago. I mean, there's some part of this that's magnitude. So Liberation Day was a shocker. And then there's some part of this which is the start stop and the inconsistency. And as you say, not necessarily convincing the market you've got a well thought out plan. Let's step back a little bit. Maybe take us into the classroom.

[00:06:56] Teach us a little bit about tariffs. And, you know, if we were to sort of hear your maybe stylized model of how the FX might adjust, you know, what portion of the tax, as it were, is borne by the. You know, the country on which the tariff is placed, the company in the US, and then let's just say the consumer. How do you how should we think about those as a starting point?

[00:07:24] I know there's a tremendous number of complications and cross currents and something like that. But just maybe start from, you know, a basic analysis or thought process between behind how a tariff works. Sure. And can I say, you know, I'll start with the formal sort of economic analysis. But we also have to talk about the, you know, the game theoretic analysis. And I think that that's part of what the market is focusing on now.

[00:07:53] But in theory, if you're a large economy, like say you're a large buyer of anything, you can affect the price by your buying patterns. And adding a tariff is a way of adding a tax on the good that you're buying. And in this case, it's goods that come from abroad. And the question is, do they say, nope, we're going to stick to the old price and the tariff just goes on top of the old price.

[00:08:21] And if you're a big market and the valuable market, the idea is that they will absorb some of it in profits. And so that you get to collect the tariff. But the inflationary impact, the price impact isn't the full impact.

[00:08:38] And you can look at this in the past, right, that if you think of it in competitiveness terms, when we, you know, finished the election, when we came into this year, market was thinking, OK, maybe I'll try and do 10 percent tariffs kind of across the board. China being exceptional because of the other issues. Between the U.S. and China, you know, euro goes from parity to 110. It goes from 110 to 120.

[00:09:08] That, you know, a 10 percent move in sort of competitiveness and prices is something that we've experienced before the market will be able to deal with it. I think that when, you know, the numbers came in at multiples of that 10 percent and there wasn't an answer to the question of, OK, tell us what you want. You know, and we'll see what we can do.

[00:09:35] I think that the market became much more skeptical about their ability to gain what they want from the tariffs. Plus, we began to be much more concerned that U.S. supply chains would be heavily affected by the tariffs. That goods that goods that we need. And that we don't have the capacity to produce in size right now because we've been depending on foreign countries.

[00:10:03] You know, those might not be available. And you can look at the COVID example where, you know, at times, you know, car production and production of other goods was pretty much halted because there were small components that become unavailable. That multiplies the impact. So it's not just saying, OK. You know, we're going to have a 10 percent tariff. It most means it's a 10 percent price increase.

[00:10:31] Maybe they're going to absorb some of it. It's all, you know, it's all going to fit into the normal framework. All of a sudden, you're talking about much bigger supply impacts that you're going to see. And I'd say this, that the game theoretic impact is sort of like how other countries approach you on this. And are they able to say, look, we understand the issues that you're raising and, you know, we'll try and deal with them.

[00:11:00] Because, you know, many of them, I think, in principle, are reasonable in the sense of there are some non-tariff barriers to U.S. goods. Tariffs in most of the world, say, as of January the 1st, were higher on U.S. goods and U.S. tariffs were on incoming goods. But all of a sudden, you're facing something that kind of makes no sense. Like, oh, a sales tax, which is what a VAT is.

[00:11:30] We're going to consider that a tariff. And, you know, instead of talking about Europe moving from, you know, their average tariff of 5% to, you know, the U.S. average tariff of 2% or 3%, you're talking about saying, well, you know, we're going to start by tariffing you up by 20%. And people say, woo, you know, we don't even know how to discuss that. So I think that the market is looking at this and countries are looking at this and they're having a very hard time, you know,

[00:11:58] sort of processing what the negotiation process is going to be and making sense of the, you know, making sense of where this is going to end up. Yeah. One of the pieces of research that you shared was just around the kind of number of elements of the plan that need to kind of be simultaneously satisfied. And, you know, one of the starting points is balance of payments math, balance of payments identity math.

[00:12:29] Why don't you walk through as an international economist, you know, with FX expertise, someone that looks at that, those types of identities, what the administration is trying to solve for and why that becomes difficult to solve for? I mean, first it's something, an identity is like a law of nature. You can't violate it.

[00:12:51] And the balance of payments identity tells you that capital inflows are equal and opposite to your trade deficit. Because if you have a deficit, somebody has to lend you money to finance it. You know, and when the willingness to finance it changes, and that can go in both directions, the exchange rate is the balancing item.

[00:13:16] So if you look at what the administration wants, they wanted to get the trade deficit down. And the bigger part of the current account deficit is still the trade deficit for the U.S. So they wanted the balance of payments to get stronger. At the same time, they were kind of arguing that they wanted direct investment from abroad in the sense of factories.

[00:13:45] And they didn't want U.S. interest rates to go up. So they wanted foreigners to continue to lend money to the U.S. And, you know, basically keep our rates curve, you know, relatively low. And you kind of say, well, if you want both, you can't have both sides of the current account identity improving in the sense that you can't have capital inflows go up. And the, you know, current account deficit go down.

[00:14:13] And if that's what the market wants to do, the balancing item is the exchange rate. And the exchange rate has to go up. And it can go up very sharply in order to ensure that that identity is balanced. You know, and I think what's happened is that the market is, or investors, you know, we're kind of saying how, you know, at first they're saying, well, the dollar has to be really strong.

[00:14:41] If we're going to get these capital inflows and if we're going to get an improved trade balance, that's a formula for a stronger dollar. And then, but then you sort of say, well, what can go wrong? And what goes wrong is if the market loses confidence, you know, in U.S. markets and adds a risk premium to U.S. assets because, you know, the tariffing was far more volatile than the market expected.

[00:15:08] And they're talking about changing international financial relationships as well. So there's concern there. And, you know, obviously the equity market, we're seeing where the VIX is trading. There's uncertainty there. What happens is that instead of getting what you expected, which was everybody fighting to bring money into the U.S. and bidding the dollar up, they're sort of saying, well, you know, maybe we should lighten up a bit because this doesn't look like it's going to, you know,

[00:15:36] add up in a sense to, you know, the vibrant economy that they promised and, you know, the kind of investment environment where, you know, foreigners would sort of say, yeah, you know, our investments are protected. There's no reason to worry or to add a risk premium when we're investing in the U.S. because everything is safe. So I think that there was a very quick, you know, change of view.

[00:16:02] And one thing I would add about currencies is, you know, and it relates back to the, you know, to the balance of payments identity. It's that the reasons currencies move so much is because they don't have that much of an impact. If, you know, and what I mean by that is if, you know, if you listen to a finance minister or even to the Trump administration, they, you know, kind of view, okay, you get a 10 or 20 percent currency move.

[00:16:30] That's going to be enough or, you know, competitiveness move. That's going to be enough to move the trade balance. You know, historically that it takes more than that. And, you know, if the market is beginning to add a risk premium and you're sort of saying, okay, how cheap does the dollar have to get in order to offset that risk premium? So they say, well, you know, maybe there's more risk, but there's more return because it's gotten cheaper.

[00:16:59] The answer often is it's got to get quite a bit cheaper than what you think. And that, you know, the sort of moves that are shocking to us, 5, 10 percent, you know, when we think of them happening in a short period of time, you know, those moves are not nearly enough. And, you know, that is the risk that, you know, everybody is pondering right now.

[00:17:22] Yeah. The interaction between a currency and its local stock market has always been super interesting to me. And if you look at, you know, an EM currency as an example, it is stock market down currency weaker very, very consistently. You know, even certain DMs have experienced that. The euro crisis was a good example where, you know, the euro was a VIX index basically in 2011.

[00:17:48] And for the dollar versus the S&P, that's a really interesting correlation as well. And, you know, the 2022 is rising rates, stronger dollar, lower S&P. I looked at it and the correlation between the dollar and the S&P was more inverted than between the S&P and the VIX. So the dollar really was this, you know, this risk. And now you have the opposite. I'd love just for you to reflect on,

[00:18:18] you know, dollar weakness amidst a 50 VIX amidst, you know, almost a 20% drawdown in the S&P. Some part of your research talked about rate differentials and Fed funds futures coming down, I think by about 50 basis points from the start of the year, like the DEES contract. How should we think about what the weak dollar is telling us right now amidst this tariff, you know, campaign?

[00:18:47] There's a number of explanations for dollar weakness. And I, you know, I, and none of them are kind of, you know, can fully be, you know, justified. And, you know, there's some truth to all of them probably, but it's hard to sort of say this is the key force, but among the forces that have changed, I mentioned the uncertainty about, you know, the possibility that foreigners are adding risk premium to U.S. assets.

[00:19:16] You know, a few days after the tariff announcement on April the 2nd, another administration official sort of gave a talk and, you know, was talking about the international financial side. And I think that one aspect of the tariff discussion sort of expanding the envelope of possibilities, because I think it's, you know, it's widely acknowledged that the tariffing went much further than most of us had expected.

[00:19:45] And then you sort of hear discussions about changing international financial relationships. And you sort of say, okay, if they, you know, if the tariff story can change and be so much broader than what we expected, the international financial side, maybe that one is going to be much more open than we expected in terms of how the U.S. deals with capital inflows,

[00:20:12] how it deals with, you know, payments to foreigners, you know, dividends to foreigners, which, you know, have been sacrosanct till now. So I think that the, there's an element there where, you know, the, the risk premium on all assets story has gone up. I think there's a lot of pessimism about the U.S. economy and that's come upon us relatively quickly. We keep looking at the hard evidence for this and, you know, there's evidence that the U.S.

[00:20:42] economy is slowing very gradually. You know, it's harder to find evidence that's actually, you know, sort of falling apart just yet. I mean, obviously sentiment is very low right now, but the, you know, they think it's putting the Fed into a difficult position that there's nothing in the hard data that they can grab onto and say, this is telling us that the U.S. economy is going to be much softer.

[00:21:06] At the same time that, you know, we've seen these unwinds in sort of popular trades in the hedge fund market, which were, you know, involved betting that the futures market and the spot market would converge over time. But what they were, you know, buying was long-term treasuries. And now, you know, with the pressures that you're seeing that some of, you know, there's

[00:21:35] discussion in the market that some of those trades are being unwound, which puts some upward pressure on treasuries, even though the, there was a lot of, you know, normally you expect treasury yields to go down in a period of risk appetite. And we had episodes of treasury yields going up. And it's also the possibility that foreigners are just kind of saying, you know, for now, you know, we've been going along U.S. assets for a long, long time.

[00:22:03] You know, the S&P, you know, if you take a look at the ratio of U.S. market cap to the market cap in the rest of the world, went up by three or four times, you know, over the last 20 years or so. It really was a very sharp pickup, an indication that the U.S. kind of was the only game in town. And the U.S. was the high yielder for a long time, not just by, you know, 20 basis points, but by 200, sometimes 300 basis points.

[00:22:32] With those different, you know, with the yield differentials collapsing and with the attractiveness of, you know, the U.S. equity market kind of coming under question, it's possible that, you know, foreigners are just taking their money home. Both, you know, private sector foreigners and it could be the, you know, reserve managers as well. So, you know, there's a lot of dollar negatives in play right now.

[00:22:57] We're not sure which is the dominant one and we're not sure which one is going to end. What you probably can say is that if it's just the unwind of the basis trade, we'll probably know this soon enough because, you know, that trade will be gone. Markets will calm down. The pressure on U.S. rates will go away and we'll see some restoration of the normal types of relationships have disappeared in the market.

[00:23:25] And I'd say that the, you know, the key relationship that disappeared is that normally when equity prices go down, everybody flocks and buys treasuries and buys dollars. You know, that's part of the so-called dollar smile. It's been, you know, part of the environment for decades now. You know, when I look at my, you know, I have equations, you know, sort of statistically measured relationship of the drivers of the dollar.

[00:23:56] And, you know, they fit reasonably well over the last couple of years. Nothing ever fits perfectly, but you could sort of say, yep, you know, wider interest rate differentials, stronger dollar, weaker equity prices tended to be a strong dollar because people would buy treasuries. That would be the first stop that they would go to. Over the last couple of weeks, what you've seen is that, you know, it's like the jaws have opened up in

[00:24:21] that relationship that the given rate differentials, the fact that European rates and global rates have kind of been coming down. Dollar rates have kind of been going up. Given that the equity prices are so weak, the dollar should be much stronger, like seven or eight percent stronger based on the previous relationship. And the fact that that relationship is falling apart, I think, does tell you that the market is beginning

[00:24:48] to see some things differently now than they have done in the past. And, you know, this could change. We could revert back to the normal relationship. But so far, there's no indication that we are. Yeah, there's so much that we learn from these episodes of Vol. And I feel like, you know, the marketplace is some machine that is just learning from its experiences.

[00:25:13] And as you say, this last couple of weeks has got to go in the, hmm, I noticed something there, right? The bond market failed to rally. In fact, as you pointed to with the basis trade, you know, the 30-year, at least the, you know, the cash bond was selling off even as the dollar was weakening you. Those jaws opened up. That's not a normal situation, but it's something that, you know, I think folks are going to have to potentially learn from.

[00:25:42] You know, that basis trade has been interesting. It got a ton of press. Market movements are some response to a new set of developments. You've got to sort of reprice the state of the world as it becomes known to you. But also the positioning going in always matters, right? And that basis trade, by all counts, is large, well-sponsored by a small cadre of gigantic hedge funds. And it's very levered.

[00:26:08] Were there positions in FX that were, you know, really well-sponsored that got, just had to be flipped out of very quickly that might have exacerbated the moves? What's the positioning, you know, T minus 30 or 60 days in FX trade-wise? I think that the FX positioning was long dollars, but not in the leverage sense, you know, that we're talking about these basis trades.

[00:26:36] You know, but the mood going into the end of the year and sort of right at the beginning was very dollar positive. You know, and you could see papers and you could sort of, you know, like, you know, eight reasons the dollar will keep on going up sort of thing. You know, that the equities were going to be great. Interest rates were going to be higher. The rest of the world was a mess. The, you know, U.S. would kind of, you know, the response of exchange rates to tariffs would

[00:27:05] be for the dollar to strengthen as the rest of the world absorbed the, you know, the impact of the exchange rate. I think there was a lot of confidence in the dollar. And there were certain points, you know, I'd say that the dollar was the trade in the market where, you know, sometimes you have this view, okay, where's the U.S. economy going? It can be either good or bad. And you say, what's the best way of expressing it? Should I buy equity? Should I buy bonds? Should I buy the dollar?

[00:27:33] And there were moments when, you know, the consensus seemed to be that the dollar was the best way of expressing the confidence in the direction of the U.S. economy. And, you know, the turnaround has been painful. So G10FX research, obviously, Europe is a big part of it. And, you know, Europe is an interesting case because Germany has embarked on its own idiosyncratic,

[00:27:57] you know, kind of never seen before fiscal stimulus, especially from Germany's standpoint, right? That's just not something you see from a country like Germany. Germany, walk us through just the, you know, the last couple of months of the euro. What does that tell you? It's been kind of a, you know, a big move up and a big move down, right? I mean, we've got a lot of reverse, covered a lot of ground in the last couple of months.

[00:28:28] What do you see there? And sort of what are the implications from an investor standpoint? What does the current state of pricing in dollar-euro mean for investors? Well, I'd say that first, you know, coming into the year, sentiment on Europe was very negative. You know, the slowdown in Chinese economic growth that meant that some of the markets for their high-end goods had disappeared.

[00:28:57] The war in the Ukraine had sapped, you know, European confidence. The loss of Russian energy had meant that it was more difficult for European manufacturers to produce their goods. You know, there was a lot of stuff that was going wrong, you know, at the same time. And sort of markets quickly, or not quickly, but over time built up this, you know, very

[00:29:22] negative, sort of equal, as negative on Europe as it was positive on the U.S., the surf consensus. And sometimes when that consensus is so, you know, deeply baked in the cake and you get a piece of news which isn't necessarily definitive, like the fiscal spending, we're probably not going to see the impact until 2026 or 2027 because it has a very long lead time.

[00:29:49] It's unclear whether, you know, Europe, I'm sorry, Germany is in a good fiscal situation. It's unclear how many other European countries can match them in terms of ramping up the kind of spending and, you know, their fiscal situations are much worse. But still, you know, the market gets this piece of news that says, you know, okay, there's going to be some stimulus in Europe.

[00:30:17] And, you know, when positions are so short and so negative, it has a turnaround. I'd say one aspect of the FX market, it's almost a time, or it feels like it's anthropomorphic, where you say, you know, the FX market wants to see, wants to probe and see how far the Euro can go or how resilient the dollar can go. So, you know, so you get a piece of news. Say it's good news for the Euro.

[00:30:44] Sometimes the Euro goes up, but that lasts for 36 hours. It falls off again. And market participants say, look, you know, there's, it's not going to work. There just isn't enough buy-in, you know, for Euro strength. Like this time around, you know, the combination of, you know, what was happening on the U.S. policy side, you know, to some degree, the sort of discussion of the, you know, end to

[00:31:09] the war, however sort of tentative and incomplete that is, combined with the fiscal, you know, prospects, the market took a shot at it. And it seemed, it seemed to hold and it seemed to work. So, you know, you can step back and you say, wait a second, how, how is this going to play out? Because it's not as if Europe and the aggregate isn't that good a fiscal situation.

[00:31:35] Defense spending, if that was the key to success, you know, everybody would be doing it. I mean, and it's clear they're doing it reluctantly, you know, so it's, it's not clear that it's, you know, in terms of the second round economic stimulus that it provides, it's not clear how far it's going to go. But in this case, it was enough. And, you know, you saw in the aftermath that on days when there was not much news, the market

[00:32:02] was still kind of testing the dollar and testing the Euro to see if it keep going, if it could keep going. And it did. In a sense, there was this discovery, you know, not, well, maybe call it price discovery, but discovery, market discovery that the, you know, backing is of the dollar weren't quite as strong as the market had expected it to be. And the willingness to take a chance on the Euro, you know, in the current situation was stronger.

[00:32:30] Now, you know, just have to add, you can raise the question like last year, the Euro averaged about 106.50 against the dollar. Now it's trading 114. Say there's, you know, you end up with a 10% tariff on Europe and it, you know, the,

[00:32:50] from a competitiveness viewpoint, 114 translates to 125 or 126 because that's, you know, that's a 10% wedge. That's a lot of, you know, from 106 to 126, that's a big move. And you sort of have to raise, you know, the question about whether or not the European export sector is going to do and do well in those circumstances. But right now, that's very back of mind.

[00:33:20] You know, right now it's still the probing and the testing of the dollar. And almost every day, what we're seeing is that the dollar keeps on getting weaker and it's hitting, you know, even today hitting new lows against the Euro. So this is always an exercise that, you know, there's no real answer. But I do think there's value to be had by trying to kind of disentangle things and, and ask out loud what's in the price.

[00:33:46] You know, you mentioned, you know, you, you talk a little bit about the U S slowdown. You talked about, I think in some ways, and I just call it brand, you know, the U S is, um, falling victim to its own exorbitant privilege. You know, it's a, it's a chaotic implementation. And you just have to wonder if people are kind of looking at this and saying, what, what, what's the plan? And, and, you know, you call it risk premium and then the tariffs themselves.

[00:34:15] What, what do you think is in, in the price right now? Let's just say for, for a, you know, dollar Euro. It's very hard to tell. And I, I'll give you an answer, but you know, let me step back for a minute. I mean, if you look at bond yields, I mean, you kind of say, okay, what's in the bond yield, you have an estimate of the long-term equity equilibrium, real interest rate. You add on some inflation, you say roughly, you know, that's where, where bond yield should be.

[00:34:44] When it comes to FX, there's no kind of accepted canonical model that gives you a, um, an FX level that you sort of say, this is really the benchmark. And so I think that the, the market spends a lot of time trying to figure out, you know, where the resistance is, you know, where the, the room for movement is.

[00:35:09] And, you know, that's the way I was talking about, you know, market discovery there in terms of where tariffs are coming in. I don't think anyone knows. I think, you know, the administration is trying to convince the world to accept a 10% tariff and just live with it. You know, the equivalent of sort of cutting profits by 10%, more or less. And, you know, I, I think it's, we've seen these kinds of movements in the past. It's possible it's going to happen.

[00:35:39] And it's possible that a lot of countries will be tempted. I mean, it may not be, you know, their desired path, but it could well be something that they can live with. You know, I think there are other issues, like a lot of countries, um, want to protect their agricultural sectors.

[00:36:00] And that may be a very tough nut for the U S to crack, to, you know, go to, you know, sectors where the poorest people typically live or, you know, kind of work in and kind of say, we want you to take our grain and, and, you know, put your own agricultural sector under pressure. You know, there may be some red lines there that the rest of the world can't accept, but

[00:36:26] I, you know, I think it's clear that there's a willingness to negotiate and, and the sense that they, you know, they, the clarity or sort of knowing where you stand seems to be more important to many countries and sort of saying, is that 5% or 10% tariff, as opposed to saying, you know, do we have any idea of where this is going to end up? A lot of this is modeling and trying to, you know, mathematically estimate, uh, sensitivities

[00:36:54] who, what part of the value chain is going to absorb what amount, but in, I'll just go back to your game theory idea. There is seems to be a lot of that. And I'm just wondering in your conversations with clients, how much of it is about trying to handicap the personalities? You know, we hear about the Lutnik component and then the Scott Besson component who might be a little bit more down the middle.

[00:37:22] Is that part of what end clients of, of yours, uh, are trying to, to guesstimate and I'll throw in there is this sort of whole exercise about trying to isolate China. I'm just curious as to that kind of part of the conversation, the strategy and the personalities involved. I think that there was also some idea that if you come up with really big numbers, the,

[00:37:50] there will be a sense of relief when you compromise on, you know, 10% or something more moderate, you know, and I think the, the advice that some administration officials were giving to countries not to retaliate, to come and negotiate, to reduce their own tariff barriers was a way of, you know, kind of setting the bar. So, or, you know, getting the negotiation starting from such an awkward position that, you know,

[00:38:18] 10% would seem as a, as a relief. But from the U S viewpoint, I think the, the tax bill is something that's really important. And the, it limits how much they can give up on tariffs because they need the revenues. It's, it's very unclear how much the, the Doge initiative will be able to get them in terms of sustainable spending reductions. Doesn't seem like nearly the trillion that Elon talked about.

[00:38:49] Well, so far the numbers, you know, may not be adding up to quite that much. Yeah. So, you know, getting a couple of hundred billion off tariffs is something that, you know, is, is going to be the pay for, you know, even though technically it might not, you know, if for various reasons, it shouldn't be included in the reconciliation bill. It looks like they're going to count it. So I think at, at, at the end of this, there, there's this idea that in order to be able to,

[00:39:18] you know, both keep the 2017 tax cuts and maybe add a few more. That you're going to collect revenues from tariffs. I think that's a big part of the story that we're getting here. And weirdly enough, and it hasn't come up, but you know, from, if that is the story, say the U S tariff, the world at 10% and the rest of the world tariff, the U S at 10%.

[00:39:45] That might not be the worst outcome because U S would still get its revenue. The outcome would be that there's less trade, which there would be a, you know, an economic loss because, you know, you know, we'd be making stuff that we should be buying from other countries and other countries will be making stuff that they should be buying from us. But it's, you know, it's within the, you know, the normal range, you know, that could end up

[00:40:11] being the, the outcome that it's not a slam dunk, but this was a revenue source that they felt was very necessary in order to get the tax cuts. And that's kind of the ultimate objective. I think one thing I just had found fascinating and Powell has been very explicit on the dual mandate, just kind of running into itself, right. That you've got at least a short-term price, higher impulse, higher prints of inflation doesn't

[00:40:41] mean it's sustainable. And, you know, it could be that the risk offness of these, this last couple of weeks creates the weak growth that brings down inflation ultimately. But, you know, you've got the idea of wanting to ease to protect growth and, you know, staring at an inflation environment that's about to turn worse. It's a extremely complicated backdrop for, for the central bank.

[00:41:08] I'm curious, how does that conflict make its way into, you know, certain FX relationships? Interestingly now, I mean, I don't think it's making, having that much of an impact. If there was a big move in the U.S. economy, it wouldn't matter. I think that if you look at the way market expectations of Fed funds have moved, you know, in recent weeks, they've been very stable.

[00:41:33] And I think from the Fed's calculus, there's not enough evidence that the economy is slowing down. I think that they are concerned about inflation. But they're going to face pressure from the administration who would say it's going to be one round of inflation and a relative price change in the sense that imported goods are going to go up in price, but it's not going to be prod inflation.

[00:41:59] And the pressure would be on them to try and pressure would be on the Fed, not to raise rates unless they had compelling evidence that we're getting second rounds of inflation or that wages are responding or so on. In terms of the dollar, it can play several ways.

[00:42:20] I think based on Powell's comments, he really wants to make sure that long-term inflation expectations stay in bounds and don't deteriorate. Because in that case, the higher interest rates that would result would, you know, it would weaken the dollar.

[00:42:39] Not that that's his main focus, but would reflect the loss of confidence and inflation stability, you know, going, which we haven't had really in the U.S. since 1977-78. And, you know, and again, normally because of the confidence that the Fed is going to respond to inflation, if inflation picks up, yields pick up, and the dollar picks up because the market says, yep, the Fed's on the job.

[00:43:06] They're going to raise real interest rates and that's going to raise real returns. If the market concludes that the Fed has more of a tolerance for inflation than they thought it did, that key longstanding relationship ends up getting reversed. And, you know, the dollar could weaken even as nominal yields go up because the market is concerned about the inflation outcome. What are the balls in the air?

[00:43:34] One, we have to see who's going to be right, whether it's the administration kind of saying one round, then it's done. So no need to respond. Or whether some of the fears that it will become broader turn out to be justified. I think the, you know, question of how, you know, and Powell has raised this, whether it's going to be like a very well-defined episode.

[00:44:04] Like say, you know, we get the inflation over three or four months, then it stops. Or whether it kind of drags on and we're not sure for a long time whether or not it's going to, you know, sort of stay in kind of wages and price increases for an extended period.

[00:44:23] So, you know, in the past, I'd say that if the market thinks that they're going to have the ability to keep inflation under control, that's broadly dollar positive. For the reason I said earlier that they see higher real rates and that's attractive to foreign currencies. It could be a little more complicated now if the market's unclear what the response is going to be.

[00:44:48] And, you know, you know, Fed, Chairman Powell's term looks likely to be up beginning of next year. So the market will be concerned about who's going to replace them. It could be that they are, you know, there's more risk premium and that risk premium is going to be harder to get rid of. And that added risk premium is, you know, more dollar, you know, from inflation risk is more dollar positive, more dollar negative than, you know, we've experienced in the recent past.

[00:45:18] I just worry also about the you talk about risk premium to the to the back end of the U.S. bond market and this, you know, impossible sort of goal of trying to rein in the spending and the debt profile. And, of course, you know, it's easy to call people. You know, deficit scolds was the Paul Krugman term for people that worried about the deficit, but I just find it impossible not to.

[00:45:47] And when you see an unruliness, a disorderliness to the back end of maybe some of that's the the swap spread unwind. You know, there's a vulnerability to a crowded trade. But that swap spread inversion. Was the peak in the VIX, so it got most inverted when the VIX peaked. And so my question is really around. Tail risks, you know, if there is a.

[00:46:14] Trade or a, you know, specific FX pair that you are watching most for. Or, hey, if this goes, you know, in a way that's unwelcome for the market, this could really have knock on effects. We do live in this global, very interconnected system of asset prices.

[00:46:34] Is there a relationship that's, you know, kind of front and center on your FX dashboard that you and clients worry about that, you know, could lead to some disorderly unwind that's tough to contain? There are a couple of things to keep an eye on, I think. One is, you know, whether the dollar over the medium term stops being a safe haven.

[00:47:03] Whether the, and if you go back, I mean, you know, the COVID crisis was a global crisis. But the great financial crisis in 2008 was very U.S. centric. But the dollar is still strengthened when that happened and U.S. yields still went down. If it's the case that you can no longer count on that, it opens up a lot more downside to the dollar. I'm not saying that that is the case, but I think it's there as a risk.

[00:47:32] If it's the case, and you kind of see it that the, you know, in the options market, the way things called risk reversals are trading, particularly the dollar against the euro and the dollar against Swiss. It's the idea of how much do you pay, you know, how much more do you pay for kind of being kind of short dollars via the options versus being long dollars?

[00:48:00] You know, how much is the market sort of viewing one side as being more desirable than the other? And the dollar weakness side is since, you know, markets were started keeping daily track of this in mid-1990s. This is like the worst. I mean, you know, in a sense, the dollar weakness side is the one that the market is favoring right now against traditional safe havens.

[00:48:26] So it's like the dollar is no longer in the set of safe havens. It's trading like a higher beta currency. Against them. Right. And, you know, it could be panic, just like, you know, the VIX being at over 50, but it could, you know, if that's sort of the way it keeps on trading, I think it could be a signal, you know, that the. There's really a sea change in the way.

[00:48:53] Global and U.S. investors are seeing the dollar is, you know, kind of safe haven and the, you know, safe asset. And how does dollar China FX fit into all this? You want to be careful on how you analyze it. You know, obviously the, you know, on the Chinese side, they have a lot of focus on the level of CNH, you know, against the dollar.

[00:49:19] You know, so far, you know, compared to everything else, the moves have been relatively moderate. So it doesn't look, you know, and I think there are good reasons for them not to really want CNH to become part of the battle against the, you know, against the U.S. You know, on the trade war side.

[00:49:40] But if you look at the shocks that are hitting the Chinese economy, the extent to which they've had to change the direction of exports away from the U.S., you know, towards other countries. The question of, you know, what about Chinese capital flows into the U.S.? Ultimately, if you're not exporting to them, do you really need to buy treasuries and, you know, hold a lot of dollar assets? There's a lot that's up in the air.

[00:50:09] There's a lot that's idiosyncratic to the U.S.-China relationship, which has, you know, from the U.S. side, it's perceived as having national security aspect, some sort of long-term competitiveness aspect. And, you know, you want to be careful. You know, in the last couple of weeks, the battle has not been dollar versus CNH. It's been a, you know, dollar versus G10.

[00:50:39] And I think that the, you know, there may be longer-term lessons that we can draw from the way that CNH trades. But I think that, you know, right now it's kind of Chinese authorities seem to be handling it very carefully and not trying to stoke any kind of, you know, trade war or other kinds of issues with the U.S. through the, you know, through the CNH.

[00:51:05] Well, all the while, gold is kind of a currency, certainly correlated to dollars or to the direction of the dollar and, you know, up a ton. I just wonder what that's telling us. You know, it's kind of assuming some role as a VIX right now.

[00:51:24] And I think your point around just trying to map the behavior of the dollar amidst, you know, bad S&P days and seeing if it's just losing a little bit of that, you know, that haven status, I think, is going to be a critical thing to watch. Well, Stephen, it was excellent to reconnect and host this conversation. I definitely appreciate your insights and I definitely want to keep in touch. Thank you for being a guest.

[00:51:53] It's always a pleasure talking to you. Thanks again and catch you next time.