04 July 2019: Trump fascinated by currency manipulation

Trump fascinated by currency manipulation

July 4th: Highlights

  • President says, “The U.S. should “play the game”, not just China and Europe”
  • Lagarde to bring political nous but not economic innovation
  • Leadership election “gets real”

Trump’s verbal interventions lack a basis in reality

President Trump believes he has bought many attributes to his role as President of the United States. This may be true, but his appreciation of economic reality seems to be based on the premise “if I say it, it will be done”. His continual accusations of currency manipulation by America’s trade partners is a perfect example. China controls its currency level as an aid to its expansion and entry into the global marketplace. The volume of goods it exports are not necessarily affected by the level of the Yuan.

However, to accuse the Eurozone of a similar tactic illustrates a lack of understanding of what has been happening in the global economy as it has emerged (mostly) from the financial crisis.

The question is beginning to be asked: “who stands to gain and what is the most significant downside effect of the trade talks between China and the U.S. which recommence next week”.

These talks could turn into a “perpetual Brexit” where both sides pose an issue to the other which could be anathema and virtually impossible to solve. China has reacted to tariffs on its exports to the U.S. by using tit-for-tat measures which have a far more significant on a smaller range of U.S. exports particularly in the farming sector which is in danger of being decimated.

The situation in the Eurozone is less complicated. The ECB slashed rates to zero and introduced QE as it has no access to fiscal policies such as tax cuts to add stimulus and as a result, the currency has suffered as the economy has faltered.

The dollar has reacted to higher interest rates in the U.S. which were necessary due to the stimulus added by last year’s tax cuts and infrastructure projects. As long as the Fed. and, to a certain extent the Treasury, remain independent, the President will not get his own way. He cannot stimulate the economy without inflation and you cannot have inflation without rate hikes and naturally, these lead to a stronger dollar and a weakening of equity prices.

Tomorrow sees the release of the employment report following today’s Independence Day celebrations.

There is a sense that the headline number will be lower than the average of the past three months which is what the Fed. looks at. However, unless there is a significant drop in the level of hourly earnings, the market will quickly settle down. Earnings are expected to have risen from 3.1% in May to 3.2% in June. This would have the effect of dampening rate cut expectations and provide a boost to the dollar.

Yesterday, the dollar index closed unchanged at 96.87 as the market prepared for today’s holiday and tomorrow’s data.

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Lagarde to raise the profile of the ECB but not its credibility

Christine Lagarde, the nominee to replace Mario Draghi as the President of the ECB, will bring a higher profile to a position which is seen as many as better served by a technocrat.

This week’s political machinations have highlighted the level of “horse-trading” that is now necessary to get anything to in Brussels, Strasbourg or Frankfurt.

Angela Merkel clearly favoured a German as EU Commission President.

For that to happen, she had to abandon her support for probably the most experienced technocrat, who is also a German; Jens Weidmann. In order to gain the support of Emmanuel Macron, she had to make a deal to have another French ECB President. Since the appointment of the President of the Banque de France would have been challenged by those who favoured other Eurozone Central Bank Presidents, Ms Lagarde was seen as the perfect compromise candidate.

She is virtually unopposable from reputational perspective although she brings just a hint of a whiff of scandal as most French politicians do. It is her ability to solve tough technical issues together with her “stomach” for the fight that will be most questioned.

The euro remains in the doldrums barely supported by the economic data which is now showing that there is a “bottoming out” taking place. This scenario fits with the outlook as described by Mario Draghi who said, as far back as February, that he didn’t see a recession in the region, but a long slow recovery. Once Q2 GDP data has been released the markets may start to believe that view.

Yesterday, the euro fell marginally versus a becalmed dollar reaching a low of 1.1268, closing at 1.1279.

Hunt and Johnson enter the final lap

Jeremy Hunt and Boris Johnson the final two left standing in what has appeared to be an interminable battle to be the next Leader of the Conservative party and Prime Minister of the UK have entered the final stages of the race. Ballot papers are in the process of being mailed to all 160k members of the Party and they are expected to return them quickly since most will have already made up their minds.

Both contenders issued further policy initives yesterday. Johnson had already said that he will study the so-called “sin taxes” which he believes, while worthwhile, hit those can afford them least. This has not been very well received by health campaigners.

The latest policy changes have wildly differing target audiences and will be vastly different in how they are received. Hunt has promised to scrap the ban on fox hunting while Johnson has promised 20k new policemen “on the beat”.

Both should appeal to Conservative Party voters although there will be anti-hunting members, any policy which fights the rise in crime, particularly knife crime will be welcome in the country. Typically, Johnson, the ultimate showman, didn’t say where the money was coming from or how long the recruitment would take.

The market, already suffering from “Brexit fatigue” and now showing signs of “Leadership fatigue” craves something new to get its teeth into as the summer lull appears on the landscape.

Sterling remains under pressure versus the dollar while continuing its slow march lower versus the single currency. Yesterday it fell to a low of 1.2557, closing at 1.2570 in quiet trading versus the dollar, while against the euro, it made a low of 1.1123, closing at 1.1147.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”