The asymmetric effect: It takes more good news to move USD off the floor than in any other currency

Outlook:

Disarray in Washington and postponement of tax reform and infrastructure spending are weighing heavily on the dollar. It's hard to say which is stronger, the disarray or the uncer-tainty about getting stimulus. It would take stupendously good economic data and an unexpect-edly hawkish Fed to overcome the ever-growing negative sentiment.

And maybe not even then. We have often commented on the asymmetric effect of data on currencies. Bad news that would fell a lesser currency is brushed off by the euro when the euro is in favor, while good news that "should" provide dollar support is brushed off. It takes more good news to move the dol-lar off the floor than in any other currency. In the present circumstances, we would need Yellen to assert loudly that the Fed is definitely hiking in September, plus some far better-than-expected data, to halt the dollar decline.

This week in the US we get existing and new home sales, two consumer sentiment reports, durables, trade, with the employment cost index and GDP on Friday. GDP has its embedded PCE inflation index. The New York Fed NowCast is an unchanged 2% (as of Friday), while the Atlanta Fed GDPNow has 2.5% (as of last Wednesday). We get an Atlanta Fed update this coming Thursday. Neither forecast is anything to set your hair on fire or inspire the Fed, let alone the FX market.

We also have a slew of political developments. Congress wants to impose even greater sanctions on Russia because of its interference in the US election, and the White House is not going to fight it. This is tantamount to a tacit agreement that Russia did interfere, something the president has never admitted. The EU sees that new sanctions might harm European interests and wants assurances that sanctions will be designed to prevent it. That's the hypocritical stance we know so well from Europe, which couldn't be bothered to lift a finger when Russia invaded Ukraine but now wants not to pay any price for inac-tion, either.

With tongue in cheek, the FT reports "The preparations in Brussels also reflect mounting EU frustra-tion with unilateral economic sabre-rattling from Washington. Mr Juncker warned the US this month that Brussels would swiftly retaliate if the Trump administration delivered on threats to impose punitive tariffs on European steel. US energy companies have also spoken out against the sanctions legislation, saying it will hurt US business interests to the benefit of Russian competitors. It is unclear whether Brussels' planned response will affect the White House's thinking on the bill."

Oh, no. It's perfectly clear. The White House doesn't listen to its own advisors, let alone Brussels.

Elsewhere, some folks are inching closer to jail. Special advisor Kushner will testify to a Congressional committee, having revised his official disclosures to include vast amounts of assets previously undis-closed and hundreds of meetings with Russians also undisclosed. On Wednesday, former campaign manager Manafort will also testify. There seems to be a White House effort afoot to position the Russia connection as really belonging to Clinton and the Dems, who are projecting their own misdeeds onto Trump. This seems hardly likely to fly. The Senate will hold a sad vote on the now dead healthcare bill. Finally, the equity gang is aflutter over earnings season ramping up with some 20% of the S&P report-ing in this single week.

Discouragement is visible in inflation-adjusted real returns. On Friday, the 10-year TIPS yield fell back to 0.483% from 0.530% the day before and the high of 0.646% on July 7. The excellent WSJ reporter sums it up neatly: "At the moment, lower real yields reflect several factors, including a run of under-whelming economic data and the unraveling of postelection bets that Trump administration policies would boost growth and inflation."

One analyst says "Lower real yields, if sustained, imply lower growth potential for an economy. The hopes of fiscal stimulus in 2017 are becoming more remote, inflation is moving away from the Fed's 2% target, and Yellen told us earlier this month that the Fed's policy rate wasn't too far away from neu-tral." Even junk bonds are seeing a sell-off, and gold and silver are moving inversely to yield.

We can find nothing in here—earnings, yields, economic growth, the Fed—to justify a shift in senti-ment toward the dollar. The single thing that could provide relief is perception among traders that they have accumulated too big a dollar short position and maybe should pare it back. That delivers a correc-tion, not a reversal.

China Tidbit: As the press has been reporting for some time, China has been cracking down on infor-mal market lending, especially informal lending used to buy domestic real estate and foreign assets. The WSJ reports that the government specifically targeted a giant property developer named Dalian Wanda, Anbang Insurance and a handful of other companies. The four companies combined invested $55 billion overseas since 2015.

Foreign acquisitions showcase China's weight, but may also imply independent influence "that chal-lenges the authoritarian Chinese leadership's firm hold on the economy." Besides, buying foreign as-sets means selling yuan. "Chinese firms completed $187 billion in outbound deals last year, according to Dealogic, as private companies snapped up trophy properties, soccer clubs and hotels, while Chinese with means bought homes and pushed up real-estate prices from Texas to Sydney.

"The private sector's share of overseas spending shot up from barely above zero about a decade ago to nearly half of China's total overseas investments in 2016, before slipping back to 36.9% in the first half of 2017, according to Derek Scissors, a China expert at the American Enterprise Institute."

Here's the kicker: "Amid the rush of investments, Beijing burned through nearly a trillion dollars in foreign-exchange reserves trying to steady the yuan. That ultimately led government regulators to clamp controls on money exiting the country and to scrutinize all proposed major offshore invest-ments." To make matters worse, Chinese foreign investments are not always the soundest. "Trophy" properties like Hollywood movie companies? An official told the WSJ "... China is acutely aware that as Japan rose to economic prominence in the 1980s, its companies splurged on American real estate and other trophy assets, resulting in losses that cascaded through Japan's banking sector."

This is wise and shows China may be ham-fisted in managing the free-market aspects of its command economy—remember those dumb things it did during the last Shanghai equity market crash—but it appreciates the need to manage. The probability of a Shock from China is now reduced.                                                                                                                                                                                                                                                                                                                

Currency	Spot	Current Position	Signal Date	Signal Strength	Signal Rate	Gain/Loss
USD/JPY	110.70	SHORT USD	07/19/17	WEAK	111.96	1.13%
GBP/USD	1.3032	LONG GBP	06/28/17	WEAK	1.2701	2.61%
EUR/USD	1.1654	LONG EURO	06/28/17	STRONG	1.1218	3.89%
EUR/JPY	129.02	SHORT EURO	06/28/17	WEAK	125.73	2.62%
EUR/GBP	0.8942	LONG EURO	04/25/17	STRONG	0.8490	5.32%
USD/CHF	0.9452	SHORT USD	06/28/17	WEAK	0.9675	2.30%
USD/CAD	1.2537	SHORT USD	05/17/17	STRONG	1.3621	7.96%
NZD/USD	0.7442	LONG NZD	05/30/17	STRONG	0.7062	5.38%
AUD/USD	0.7949	LONG AUD	06/08/17	WEAK	0.7548	5.31%
AUD/JPY	86.00	LONG AUD	06/16/17	WEAK	84.65	1.59%
USD/MXN	17.7031	SHORT USD	05/17/17	STRONG	18.7098	5.38%
USD/BRL	3.1416	SHORT USD	07/17/17	WEAK	3.1794	1.19%