EUR seriously overbought, threatening key support

Outlook:

The US yield is dipping and the German yield is rising, narrowing the yield differential advantage, so the dollar gain has to be attributed to other factors. We wrote early Friday that the dollar shouldn't flop after only one day of rate hike/normalization relief. Sure enough, the Euro is now threatening hand-drawn support. Normalization is a big deal. And we should not neglect that the euro was seriously overbought in the first place.

Tomorrow Fed chief Yellen will speak on "Inflation, Uncertainty, and Monetary Policy" and possibly provide some additional ammunition for faith in the Fed's wisdom. We also get 15 speeches from Feds this week, including Dudley, Evans and Kashkari just today. Draghi speaks today, too, and BoE chief Carney on Thursday to celebrate 20 years of central bank independence, with Fed Vice Chairman Fischer attending.

The second factor is political outcomes that are less desirable for civil order, including the far right getting a foothold in Germany. We imagine the stand-off between Spain and Catalonia is going to end badly. Spain says the referendum next weekend is illegal and may try to halt voting with force, but even if it backs down, the vote will be null and void.

Equally important, if not for currencies, is the Kurdish referendum today. Catalonia has about 7 million people, nearly all within the borders of Spain. The Kurds have about 28 million but perhaps as many as 32 million, scatted across five countries but the majority in Iraq. Iraq has already said it will not honor the vote, but if ever a minority earned its own country, it's the Kurds. The US opposes a Kurdish homeland, a craven and foolish stance. The astute political commentator Fareed Zakaria says there is only one good guy in the Middle East, and it's the Kurds.

The one political outcome that is vaguely favorable for currencies is May's speech on Friday in Italy calling for a two-year transition period after the exit in 2019 in return for the UK paying into the EU budget. Chief negotiator Barnier said the initiatives are "constructive," the first positive thing we have heard from the EU camp since the referendum last year. We still don't have a dollar amount that is universally agreed, however. Numbers are being thrown wildly around, sometimes without an identifier—it's "one hundred" but is that pounds or euros? Or maybe it's £40 billion or some other number. Bloom-berg reports this is going to do down, excruciatingly, to the last penny.

We do not recall a period when politics spread out over such a wide space has had such a big effect on currencies. Back when we had Bader Meinhof, the Red Brigade and other terrorists, European currencies were mostly insulated. Japan has traded in old leaders for new ones with barely a burp in the yen. And we have already noted that Trump has up-ended the US apple cart so that we cannot know whether the next tax plan to be announced this week is supporting the dollar—or being ignored.

Realistically, the German election effect should be short-lived. Merkel has a tough row to hoe forming a new coalition and some writers expect the new government, when it finally gets formed, will take a harder line on fiscal matters. So what? That can only be euro-favorable. The implication is that the euro slump so far today will quickly be reversed by week's end.

Not so fast. The euro is slumping on a short-term political event but the dollar is firming on the normalization story. Which is more important, underlying fundamentals that support a rising rate differential or politics? If politics is going to have strong short-term effects, the dollar is cooked. Merkel is a Steady Eddie while Trump is intemperate, erratic, inept and fond of grabbing headlines with shocking statements. In a word, embarrassingly non-presidential. In any contest over headline-grabbing, Trump wins hands down. In sum, the economy may be okay and the Fed living up to our fondest expectations, but Trump can offset it all with a tweet or two.

So, we are still in the awkward position of seeing the dollar continue to improve, if only because it was so oversold—but horribly vulnerable to the repulsive, destructive Trump.

US Politics: American readers will have their own views, but non-US readers may be confused by the brouhaha over professional athletes kneeling when the national anthem is played. Trump criticized them for not honoring the flag instead of conforming to the convention. That's rich, from the guy whose chief appeal to voters was non-conformity to conventions and a desire to tear down the Establishment.

Trump said team owners should fire players who disobey and should compel them to stand. The whole thing started when a player (currently unemployed) named Kaepernick, who is black, declined to stand as a protest to racial injustice, specifically the many police shootings of black men. He certainly has a point, and a constitutional right to express it by kneeling. Yesterday an increasing number of players kneeled and the rest joined arms in solidarity. So far the team owners are siding with the players, even those who support Trump.

Trump increasingly thinks he is a dictator who doesn't need to understand or respect the constitution, let alone racial injustice. Sports are more popular than politics and some sports figures are more liked than Trump, but symbolic patriotism is a big deal and blind Trump followers may indeed boycott games. Here's a telling comment from TreasSec Mnuchin: "They can do free speech on their own time."