Tuesday’s most read post, oddly, was this one: “Trump’s Idiot Trade Czar Tanks Dollar With Absurd Attack On Germany.”
I say “oddly”, but I guess I shouldn’t be entirely surprised. After all, Peter Navarro – who I’ve taken to calling Trump’s “economic spirit animal” – is an exceedingly controversial fellow. In academic circles, he’s considered something of a joke which at least partially explains why Trump thinks the guy is some kind of visionary.
Well, much like Steve Bannon, Navarro has been elevated to a position where what he says actually counts. And not because it should. Rather because it must, now that the two men have been empowered by the same person whose social and economic policies they inspired.
In short, it’s going to become increasingly difficult to take Nordea’s advice and “just ignore” them…
Below, find the latest from SocGen on Navarro’s euro rantings.
The Trump administration’s focus on ‘currency manipulators’ goes on. Peter Navarro, the head of the National Trade Council, cited the Peterson Institute of International Economics when saying that the implied fair value for the German mark was EUR/USD 1.18 and indeed, that is the FEER-consistent rate in PIIE’s November 2016 update of FEERs. The focus on the PIIE work suits the Trump administration because it concludes the dollar is significantly overvalued (by 7% relative to a FEER measure), and that equilibrium FX rates against the dollar would only see the Argentine peso need to appreciate. Mind you, the Euro is not, on the PIIE calculation, undervalued overall (nor, indeed, is the Yuan). It’s the US dollar that’s out of line in those relationships.
But since a FEER is an FX level that would stabilize balance of payments imbalances over time, what this really amounts to is that the Trump administration is criticising all the major current account surplus economies. Germany, Japan and China are the big ones by size, but they’re not the big ones in terms of surpluses. Norway, Switzerland, Sweden, Singapore, Malaysian, South Korea and Taiwan could all easily catch the eye of the new team at the White House.
All the jawboning is chopping FX rates around all over the place, and I’ve been reading more and more about de-coupling between the dollar and bond yields. It’s too early to conclude that. It’s not the short-term rates that matter to me, or nominal ones, but relative real long-term yields. Those have been a good indicator of FX trends since 2015 and still seem to be.