If commodities and emerging markets lead, the dollar’s resilience may be short-lived

Outlook

This has been a dull week and will likely be just as dull today. In the US, we get the University of Michigan confidence indicator. And without anyone noticing, there is a virtual G7 meeting today. Usually there is some chatter ahead of time. Both Fed chief Powell and TreasSec Yellen will attend. All we know ahead of time is that Japan wants to talk about digital currencies (and how to tax them). We can hardly expect some on-the-side whispers this time.

Monday is a national holiday in the US. The banks and stock and bond markets are closed, although usually the bank FX desks are manned at least until London goes home. Besides, the lunar new year holiday is now in full swing in Asia, so FX will be thin. This can mean higher intraday volatility (or just dull sessions).

Besides, we are all somewhat befuddled by the charts. Whether any currency is trending up or down depends entirely on which timeframe you are looking at. Did the euro start a comeback into a rising mode after a downward correction by a little more than 50%, or is the upmove finished? When it comes to sterling, we are more comfortable identifying the current dip as corrective. It’s highly dangerous to take guidance from other assets or other currencies, but if we think commodities and emerging markets lead, then the dollar’s resilience may be short-lived.

On inflation: Analysts are unwilling to give up the inflation narrative no matter what. The FT reports BoA sees asset price inflation bleeding into other assets once the pandemic is over, out of stocks and bonds and into collectibles, commodities and gems. Oh, yeah, regular stuff like food, too. The point: “Real assets will outperform financial assets.”

A second FT story contains a prediction of a stock market drop on the grounds that the Fed and the Biden recovery spending will overheat the economy–"the 10-year break-even rate is already at 2.2%, no matter what the actual data just showed and Powell’s idea that inflation will not be large or sustained. Even if the Fed does not taper/raise rates, one source of stock market despair will be that old bugaboo, higher taxes by the Dems. The Jeffries analyst says “The risks are building for obviously overvalued US equities.”

In Germany, BBK chief Weidmann predicts inflation will rise over 3% this year and policy will need to be tightened. Gee, no surprise. He also said once the pandemic ends, Germany needs to return to tight budgets as well as tight monetary policy. Notice that the Bund yield seems not to have moved one inch on the remarks. Weidmann is the boy who cries “wolf.” The story seems to have had no effect on the euro at all.

Tidbit: China is picking fights with others and not just the US–"Australia and now the UK, over news permits. Then there are border issues with India. Nearly all of these are economic responses to political criticism.

Politics: The prosecution team in the Trump impeachment trial is really quite impressive. One we like is California’s Liu, who said he is not afraid of Trump running for office again; he’s afraid of what Trump would do if he lost. After all, Trump has never conceded he lost the 2020 election and insists that the vote was rigged, mostly by mail-in ballots (and never mind that he himself voted mail-in for many elections before this last one). Trump’s narcissism used to be pathetic and ridiculous, but now it has become dangerous. His lack of remorse and his praise for the rioters (“special people”) imply that another insurrection might not be so unthinkable.

The defense begins tomorrow and may not take its full allotment of 16 hours. Once you remove the Constitutionality and free speech arguments, there’s nothing left. The defense lawyers can’t use lack of intent (to cause a seditious riot) because Trump refused to testify directly. What can they possibly say? Again we will be glued to the TV for far longer than is healthy.

But never mind. The Republicans are going to vote to acquit. We won’t know if this is a wise choice until they go up for re-election. We also await new polls about the public’s response. So far all the polls show a majority believe Trump is responsible for the mob, but the Ipso-Reuters poll shows only 47% think he should be convicted. An earlier CBS News/YouGov poll (Tuesday) had 56% calling for conviction. As expected, opinions runs almost straight on party lines and nearly everyone admits they had made up their minds before the trial even started. It’s interesting that the WSJ puts its voice behind conviction. Presumably the deep-pocket donors to Republican Senators are readers of the WSJ, but it’s not likely enough will be moved–"it would take 17 to switch sides.

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