I suppose it’s always true that one week sets the tone for the next, but to the extent a truism can be “more” or “less” veracious, then it’s fair to say that last week is going to be more influential than usual when it comes to what happens next.
Donald Trump’s criticism of the Fed and his explicit acknowledgement of the monetary policy divergence between the U.S. and China, means everyone will be holding their breath for any further indication that the White House intends to pressure Jerome Powell into adopting a more dovish approach in order to push the dollar lower and thereby ensure that America’s “competitors” (as Trump calls them) aren’t able to use currency devaluation as an umbrella while trying to weather the tariff storm.
In that regard, all eyes will on the yuan to see if the PBoC continues to countenance further weakness following the dramatic weakening of the fix on Friday. Absent signs that capital flight is picking up, there’s little incentive for Beijing to lean against further FX depreciation and Trump apparently knows it.
“The precipitous drop in the CNY/CNH since June, the lack of decisive intervention to brake its fall beyond 6.70 vs. the USD and the absence of concerns over capital outflows has led market participants to wonder whether policymakers are condoning declines as a way of offsetting the negative effect of US tariffs”, Barclays wrote over the weekend.
The answer is obviously “yes”.
“The nearly 10% USD/CNY move since March has almost completely offset the impact of Trump’s potential tariffs before they have even happened”, Deutsche Bank wrote on Sunday.
Meanwhile, the U.S./China equity ratio is sitting at its lowest levels in more than a decade.
As far as fundamental (i.e., non-Trump) drivers for the dollar this week, there’s durable goods on deck as well as Q2 GDP, but even if the data continues to support the U.S.-centric growth narrative (USD+), there’s no guarantee that will be enough to offset the orange elephant in this room.
There’s a ton of analyst commentary on that here, and for what it’s worth, Barclays had the following to offer on Sunday:
Domestic headlines are bringing volatility to markets. The dollar weakened and the Treasury curve steepened after Trump openly criticized the Fed for gradually increasing interest rates, which he perceives as dampening the administration’s economic policy, while also talking down the currency. The verbal intervention is likely to keep the dollar subdued only temporarily, as the administration has expressed discomfort with a strong dollar before (eg, Mnuchin in January 2018) but does not have the policy tools needed to weaken the dollar on its own. However, the criticism of the Fed is new and marginally increases uncertainty about US economic policy and the USD. Although economic performance supports the dollar, US assets could underperform if the macroeconomic framework is further put into question. A continued criticism to monetary policy and/or increasing uncertainty about economic policy would likely increase the volatility in interest rates and bring a steeper curve, weaker risk appetite and USD weakness particularly versus safe haven currencies, especially the G10, while strengthening versus EMs.
In the week through Tuesday (and this is amusing), net long positioning in the dollar rose for a fifth straight week to nearly $20 billion:
Over the weekend, the G-20 meeting in Buenos Aires focused primarily on trade (for obvious reasons) and despite Trump’s Friday Twitter broadside, currency wars apparently weren’t openly discussed, although one certainly imagines there was plenty of whispering going on. Here’s Bloomberg:
Prospects of an intense debate on currencies had dramatically increased on Friday when Trump accused the EU and China of manipulating their foreign exchange rates to obtain trade benefits and said a strong dollar and rising Fed interest rates were undermining U.S. competitiveness.
The currency issue didn’t come up during Saturday discussions, according to Canadian Finance Minister Bill Morneau.
On Saturday morning, Steve Mnuchin attempted to reassure everyone that Trump respects Fed independence and isn’t attempting to wade into the FX market. That despite what the President actually said. This is another case of administration officials telling everyone to simply ignore what comes out of Trump’s mouth. Generally speaking, that has not been a good strategy when it comes to trade.
Speaking of trade and countries Trump targeted in his Friday one-two Twitter punch, European Commission President Jean-Claude Juncker will be in town this week to try and talk Trump out of imposing tariffs on autos, a threat that has everyone rattled. Larry Kudlow thinks a breakthrough is possible and as far as Trump goes, he had this to offer last week: “Cars is big one“.
We’ll get the ECB, which should be a non-event although you should note that back in January, Mario Draghi bristled after Steve Mnuchin complicated the ECB’s exit strategy by talking down the dollar in Davos. This is of course the first ECB meeting since last month’s miracle of monetary policy communication that found Draghi pulling a dovish rabbit out of a hawkish hat (lots of animals in there), by pairing state-and-date dependent rate guidance with the announcement of a sell-by date on asset purchases. Here’s a bit of color from BNP:
Six weeks after the ECB’s June policy meeting, we see little in the data that might sway the policymakers in one direction or another at Thursday’s Governing Council meeting. Increased confidence in inflation is somewhat offset by mounting concern about the implications of the trade war, suggesting that the ECB is likely to remain cautious. The press conference, therefore, looks set to be a holding operation, with Mario Draghi likely to restate his key points from June.
That means it will be down to the data (and to Trump) to drive EURUSD. We’ll get flash PMIs and German IFO business climate in the days ahead. Remember, the jury is still mostly out on whether the sharp deceleration in eurozone economic activity that unfolded in Q1 was in fact “transitory”, as the ECB hopes.
The CBT is on deck as well, and that should be all kinds of amusing as it will be a good litmus test of how much central bank independence still exists in Turkey now that Erdogan has installed his son-in-law Berat Albayrak as economic czar following the election. Fitch of course downgraded Turkey two Fridays ago.
“Investors’ focus has shifted to the upcoming MPC meeting as the recent amendments to the Central Bank of Turkey’s law, granting increased control to the President, combined with changes to the economic management team, have renewed investors’ concerns about the direction of economic policies in the medium term”, Barclays wrote last week, previewing this farce, and adding that reasonable people would think that “the imminent desire (and need) of politicians to offer markets a constructive narrative would strengthen the case for policy action”. You’d think; but there is nothing “reasonable” about Erdogan.
Albayrak was on the tape Sunday, promising that inflation would fall “considerably”, presumably on the back of multiple rate cuts, in accordance with his father-in-law’s version of economics, the guiding principle of which is that high rates produce inflation and currency depreciation.
ahahhah.. Turkey’s Albayrak Says Inflation to Slow ‘Considerably’: CNNTurk
— Walter White (@heisenbergrpt) July 22, 2018
Here’s the harsh reality:
For those of you wondering what it’s going to be like when Donald Trump puts Jared Kushner in charge of the Fed, watch the CBT on Tuesday for a possible preview.
On the domestic political front, you can expect the fallout from the Helsinki summit to continue as the President struggles to convince the public that he, like his ancestor Jesus Christ, is the victim of persecution by a gang of wicked conspirators. Last week was defined by a series of absolutely egregious PR debacles (here and here, for instance) and two wildly absurd interviews with Fox News, one of which found Trump and Tucker Carlson suggesting that the people of Montenegro “may get aggressive” and start “World War III.”
As for whether the President is willing to say, definitively and unequivocally, that he trusts the U.S. intelligence community more than he trusts the Kremlin, this is the best you’re going to get (from Jeff Glor’s Wednesday interview):
Enjoy the week, and remember: NO COLLUSION!
This is definitely how innocent people act on Twitter….. pic.twitter.com/8sGkTUuRKd
— Walter White (@heisenbergrpt) July 22, 2018