USD retracing from spectacular rise is only normal

Outlook:

US politics is so awful that it's hard not to attribute just about everything—gold is up! Stocks are down!—to Trump and his lies, tweets, and delusions. But we should be careful. The dollar rally actually started back in May as the Fed rate hike was anticipated, then shot down for September, then revived for December. Policy divergence was the main theme, and Mr. Draghi obliged. For the dollar to be retreating now from a spectacular rise is only normal. The market is sulking because it wants a constant diet of shiny new things. Just wait—we will get them.

And data is, as always, backward-looking. The Dec retail sales report today, for example, expected to be strong (up 0.7% after 0.1% the month before), is still not a verdict on Trumpism. Dec is often a strong month because of auto sales and Christmas. We can't give credit where it's not due. We also get the University of Michigan confidence reading, and this time we want to watch the inflation expectations component, revised last month to a new low of 2.3%. Surely it's higher now? We're not going to men-tion PPI, which in the US does not feed CPI.

Also today, amid back-door bank restructuring of Monte dei Paschi and some upfront capital raising by Unicredit, Canadian ratings agency DBRS will rule on the Italian sovereign rating. The ruling was de-ferred in November until after the referendum. At the time, the announcement said the agency was post-poning a "decision on whether to downgrade Italy's sovereign debt ratings," which bodes ill. The review was started in August. Reuters reports "a downgrade would increase the cost of funds Italian banks bor-row from the European Central Bank." We say Italy gave us daVinci, Ferragamo and Draghi, and de-serves a break.

The trade war with China has already started and nobody is noticing. On Wednesday China announced higher anti-dumping duties on US animal feed and yesterday the US asked the WTO for action on alu-minum. We see several fronts for the trade war. The first is WTO actions, which hardly anyone pays attention to for reasons we don't understand.

The second is the US labelling China a currency manipulator. The semi-annual Treasury report on cur-rency manipulation is not due until May, but analysts are already looking at the data. The Chinese trade surplus (according to the Chinese) with the US was $260.91 billion in 2015 and lower at $250.79 billion in 2016, but all it takes is a "sustained trade surplus of more than $20 billion," according to the Treas-ury's own rules. It has other rules that have so far overridden the deficit number, but Trump doesn't care. The US customs-based deficit, by the way, is $366 billion.

Merrill Lynch notes "Instead of caving in and trying to prepare voluntary export restraints like Japan did with their auto exports back in the 1980s, we believe China would start by strongly protesting against the labelling [as a currency manipulator] with the IMF, but not to initiate more aggressive retaliation ... immediately. That said, even a 'war of words' could weaken investor confidence not only in the U.S. and China, but globally."

On another continent, Bloomberg reports that Oxford Economics foresees far faster inflation in the euro-zone than the ECB is now expecting. Prices can rise by 2% as early as Q2 and stay there for several quarters. The ECB sees only 1.7% on average in 2017 and that's a jump from 1.1% in December. But Oxford's economist Saei sees the weak euro as feeding imported inflation and it won't be a one-time thing. First, consumers are buying 9% more imported goods and services than in 2009. Exporters are happy to raise prices on higher demand. And the role of the euro as an invoicing currency has fallen. Here's the kicker: "Underestimating the significance of the exchange rate pass through will provide the hawkish members on the governing council with ammunition to force a discussion on tapering, earlier than expected as inflation creeps above staff projections.''

When we get a bit confused about the forecast, we look at the weekly chart. Alas, this time it offers no insights. See the chart below. The linear regression channel is nearly horizontal. If we expect the price line to "cycle" from the channel bottom to the channel top or at least the linear regression, we must ex-pect 1.0914 by end-Jan. That's the long-term linear regression projection as of today. It has nothing, really, to do with Trump or even the data. The euro is oversold at current levels. Traders just want to re-position.

Fun Tidbit: Reuters has a story on how Chinese banks are starting to recover and regain favor among analysts, 171 of whom now recommend "buy" for the big 20, from 153 six months ago. Write-offs, fatter margins and cleaner balance sheets due to debt-for-equity swaps get the credit. Here's the kicker: "China's five biggest listed banks currently trade at an average 0.79 times book value, as inves-tors have discounted for the costs of non-performing loans (NPLs) and subdued profitability. The steep price-to-book discount compares to the banks' five-year average of 1.0." Anyone who sees this as a screaming buy is delusional.

Politics: Cabinet nominees lied through their teeth to Congressional vetting committees. Sessions says he no longer supports voter suppression. Mattis has "no plans" to roll back women in the military, a statement everyone with an x chromosome knows all too well means he is about to do precisely that. Trump says Obamacare won't be repealed until it's replaced but economically, it's literally impossible to deliver a better plan at a lower cost, although we like the part about strong-arming Big Pharma.

The Justice Dept will investigate FBI chief Comey's interference in the election, but the inspector gen-eral has only six days left in office. Three guesses where that one goes. Clinton lost the election by only about 100,000 votes in three key states. It's not hard to imagine that the Russian hacking and Comey together sufficed to lose the election. Imagine if it were the other way around and it was the Plub who got nearly 3 million more popular votes than a Dem winner. Having said that, Clinton is unlikable and did make millions giving speeches based on public service, which looks like a form of corruption. We would not have liked Clinton as president, perhaps, but we wouldn't be scared.

Note to Readers: Monday Jan 16 is a national holiday in the US, Martin Luther King Day. Mar-kets will be closed. We will not publish a morning report and do the best we can in the afternoon re-ports. Also, no morning report on Wednesday, Jan 18 due to a court date.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	114.67	SHORT USD	WEAK	01/05/17	115.93	1.09%
GBP/USD	1.2220	SHORT GBP	WEAK	12/16/16	1.2444	1.80%
EUR/USD	1.0648	LONG EURO	NEW*WEAK	01/10/17	1.0587	0.58%
EUR/JPY	122.10	LONG EURO	STRONG	11/03/16	114.30	6.82%
EUR/GBP	0.8713	LONG EURO	WEAK	01/09/17	0.8649	0.74%
USD/CHF	1.0077	SHORT USD	WEAK	01/05/17	1.0113	0.36%
USD/CAD	1.3136	SHORT CAD	STRONG	01/05/17	1.3253	0.88%
NZD/USD	0.7125	SHORT NZD	STRONG	12/19/16	0.6963	-2.33%
AUD/USD	0.7491	LONG AUD	STRONG	01/05/17	0.7343	2.02%
AUD/JPY	85.89	LONG AUD	WEAK	10/06/16	78.48	9.44%
USD/MXN	21.6986	LONG USD	STRONG	10/31/16	18.9054	14.77%

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