Now that the ISM report has disclosed big holes in the US economy–rising prices from serious supply issues and a skilled labor shortage–we get factory orders and the US trade deficit today. Nobody will be surprised at another giant deficit, which normally doesn’t move the FX market but might be perceived as other shaky leg of the US chair.

And don’t forget the big one is payrolls on Friday. Morgan Stanley forecasts a gain by 1.25 million in April following 916,000 in March and labor force participation up to 61.65%. If the shortage of skilled labor is going to be a big factor, we may well find out on Friday.

Perhaps the FX market is so confused because it’s trying to swallow huge growth numbers, including things like retail sales and the latest gain in autos, at the same time the foundation is rotten–supply chain issues, skilled labor shortage and growth only in low-paying unskilled jobs, trade deficit, uncertain political environment. Traders are not fond of nuance. The economy is good and leads the world–buy other currencies and sell the dollar. The US foundation is rotting, risk is high that the growth surge fizzles, buy dollars. Notice that yields are sliding down and no longer the chief focus. Golly, fundamentals.

Meanwhile, the eurozone has a ray of light, even if it seems pretty feeble from this side of the Atlantic. The FT reports that 9 months after the recovery package was approved, Germany, France and Italy have presented their plans to the EC ahead of the Friday deadline.

The FT is accommodating. “The gestation may seem long given the severity of the downturn, and it will be several months more before the plans are vetted and money starts to flow. But seen from the perspective of the need to secure trust between 27 sovereign nations, the recovery and resilience plans have arrived with lightning speed.”

Besides, knowing the money is coming, and right as recovery can take off, is raising expectations. The plans are likely quite ambitious. “If all goes well, the ‘Next Generation EU’ package will fund good investments and trigger useful reforms. But just as significant as the plans themselves may be the jolt they are giving to economic governance at both the national and the European level, before a single cent has been spent.”

Let’s say the US foundations are rotting while Europe has strong foundations. Does the FX market judge that way? You bet. The vibrant and robust economy may be in Europe, not the US. Despite the euro having been overbought, chances for recovery are not bad.

Tidbit: On Thursday, Scotland will vote for 129 new members of the next Scottish Parliament. The Scottish National Party (SNP) wants to hold a second independence referendum to make Scotland independent of Great Britain and eligible to join the EU. Econoday writes “The party was defeated by 55 percent to 45 percent in the first independence referendum held in September 2014 but believes Brexit has given it a much better chance this time.” Note sterling rose against the euro after that vote. Does the pound fall if Scotland votes for independence?

Chatter persists despite a new referendum far out in 2022, if not longer. But if the SNP wins big this week, it may mean the referendum is definitely on the table. That will add volatility to sterling. As for the legal process, nothing but questions. “Under the Scotland Act of 1998, the Scottish Parliament cannot pass legislation relating to matters ‘reserved’ to Westminster, including ‘the Union of the Kingdoms of Scotland and England’. This has generally been interpreted as meaning that any independence referendum would need Westminster’s consent. However, it has never been tested in the courts and it may be that there is a route whereby the London Parliament’s say can be bypassed altogether.

“Adding to the uncertainty is the position of PM Boris Johnson. Having previously insisted that the 2014 referendum should be seen as a once in a lifetime event, Johnson’s view according to some recent reports has shifted towards a reluctant acceptance that a large majority for the pro-independence bloc should equate with a second referendum.

“Complicating matters further, even if indyref2 goes ahead the outcome is unclear. A recent survey by The Sunday Post put support for Scottish independence at 49 percent with 51 percent against. However, the numbers were flipped to 2 percentage points in favour of ‘Yes’ when people were asked if Scotland was allowed to re-join the EU after leaving the UK. A separate survey for the Scotsman last week found a 54 percent/46 percent split against.”

Got that? Remember that last time, a purported deciding factor for a vote to stay was the expense of setting up Scotland’s own health system (and taxing themselves to pay for it).

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

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This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.

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