Euro on the ropes, but not throwing in the towel yet


Except for a pullback in risk aversion, nothing new is happening in the FX market. Chandler at Brown Brothers reports a slew of very big euro options expiring this week, and that leads us to the observation that sometimes re-positioning by the big market players is sufficient to deliver a biggish price move that is entirely unrelated to fundamentals. We often see a chart with little notes in boxes pointing out some event or another purportedly the cause of a price move—when the event was simply coincident with market players adjusting positions.

After the dovish ECB last week, the euro was always going to be on the ropes. For the euro to lurch downward overnight again on a comment by Nowotny—that divergent interest rate policies favor the dollar—is the classic knee-jerk reaction but not a “cause.” In fact, euro bulls are not throwing in the towel, even if big banks like UBS are paring their year-end forecasts (to 1.25 from 1.30, according to the FT).

We “should” have an upward euro pullback that is not appearing this time, so far. We are not getting it perhaps because of a relentless stream of reminders, like Nowotny’s, of the underlying conditions. It doesn’t help that we are not getting more favorable data out of the eurozone, and the Merkel/Macron political deal is too new and unspecific to form a factor. But at the same time, we are not revisiting the May low at 1.1510. At a guess, the urge to correct is still alive and well. Keep a close watch.

Tidbit: Bloomberg reported “The U.N. Human Rights Council on Monday condemned U.S. President Donald Trump's policy of taking children from immigrant parents. The administration, which holds 12,000 immigrant children in 17 states, is quitting the council, it was reported Tuesday.” The administration then said it quit because the Council is “anti-Israel.”

The blowback is significant, not least because Trump has closed the official refugee points of entry and then arrests the people trying to enter elsewhere, a Catch-22. The mean-spiritedness, in a nation of immigrants and refugees, is shocking. Governors in at least eight states are pulling out their National Guard troops from the border.

A poll shows 58% of Plubs approve of the cruel policy, but that’s 58% of the 40% supporting Trump, or roughly 23% of the total population. The author of the policy, White House staffer Steve Miller, seeks only to make a big stink and the bigger the better, on the grounds it vindicates the Trump stance that the US wants to halt incoming brown people. Miller said a true poll would show 90% approve of keeping brown people out. Alas, he is probably right. Everyone is sick of hearing “Press 2 for Spanish.”

In other words, to hell with American values and principles. Roosevelt struggled with isolationist sentiment in a similar case. And don’t forget Roosevelt had no problem putting American citizens of Japanese descent into camps that were really jails. We await a judgment in a federal court case that may make the new policy illegal. It won’t fix the immigration law but it could kill the Trump policy. And yet analysts point out that the Japanese internment camps were judged acceptable under US law in federal court (Korematsu v US). The legal system is our last refuge against a bad president but not always reliable. Democracy is the worst form of government except for all the others.


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