Euro selling off across the board as traders adjust positions despite positive EU data

Outlook:

We think the dollar is up as a default position as traders begin to see their net long euro stance as overdone or "extended." In other words, this is about the euro, not about the dollar. If so, then it's appropriate to look at cross-rates.

This is one of Rocky's Rules—when the market has no idea what it wants to do, it turns to the crosses. This time we have a rich vein to mine in the form of the euro/yen. The euro had rallied strongly against the yen starting last April on a gap on the weekly chart, and proceeded upwards in a straight line to re-cover more than 62% of the drop from 2015. We don't put any weight on the Fibonacci lines but lots of traders do, so it's not unreasonable to think those holding a long euro/yen position are starting to feel vulnerable to a pullback. Besides, Japan has been reporting unusually good data lately and even cut the monthly QE amount, although this seems more technical than a policy statement.

We see something similar in the euro/GBP chart—an overbought euro that may have put in a double top and is now grinding toward the neckline at around 0.8469. Note that this would mirror a double bottom back in 2015.

A wholesale euro sell-off—against several currencies and not just the dollar—signifies that it's a waste of time to try to make hay out of straw. European data has been excellent lately, not excluding today's crop (employment, industrial production). Never mind—when traders want to adjust positions, data is a side-show and not the main event. Some analysis credits the rise in US yields for the dollar's recovery.

No. The rise is minor and not at critical mass. We might better say we see a head-and-shoulders on the 4-hour euro/dollar chart and give that the credit.

Nobody ever knows when a correction will turn into a full-blown reversal. We would be very surprised to see the euro make it all the way to the starting point on the main chart (1.1716), or the one before that (1.1554 from Nov 1). But gird your loins.

A critical question may be "What is Mario thinking?" The euro longs got discouraged in the absence of the expected change in forward guidance. Actually, the change was more of a hope than a realistic ex-pectation. We know the ECB has named the euro as a factor in policy making. Too strong and the too -strong-to-foster-inflation currency interferes with the intention to drive toward normalization. A weak euro is better for imported inflation and thus for normalization. Analysts will be searching for com-ments from the ECB. They will likely search in vain.

Tidbit: The US government is starting to expel foreigners allowed into the country on an emergency basis (Temporary Protected Status), starting with 200,000 Salvadoreans and perhaps moving on to the 800,000 "dreamers," the children taken to the US by their parents, unless Congress comes up with a compromise in the next two weeks. This is a long-standing Trump campaign promise, along with the Muslim ban on visitors, and likely to be popular with the Trump base.

It must be conceded that more than the base approves of expelling brown people. If they were (say) Norwegian refugees, this would not be an issue and they could stay. For one thing, the Scandis speak English and if they don't, they learn it right away. You never get "press 8 to hear this message in Nor-wegian" when you call the electric company.

What is the connection to the FX market? A tidbit from somewhere else. Brexit proponent Farage met with EU negotiator Barnier yesterday and claims Barnier literally did not understand that the Brexiteers sought to control immigration and especially Middle East refugees, who are both brown and Muslim, a double whammy. Nationalism has its ugly side but is bigger than racism, and even if the nationalists didn't win in recent elections in France and elsewhere, it is resurgent.

Tidbit 2: On the regulatory front, not only is the US going to sell leases for offshore and federal land drilling, the budget removes safety precautions to prevent disasters like Exxon Valdiz and Clearwater Horizon. And ended the 9¢ tax on each barrel of oil to fund the disaster recovery fund. The tug-of-war between sane regulation and over-zealous and expensive regulation goes on.

The Trump policies are a gift to the oil and gas industry, feeding the alligators instead of draining the swamp. But the effect is to incentivize innovation in the industries that compete with oil. As solar pro-ponents trumpet, solar is a technology, not a fuel and its cost can go in only one direction. In fact, Quartz reports today that "LEDs are having a big impact on climate change. They reduced carbon emis-sions by 570 million tons in 2017—equivalent to closing more than 160 coal power plants." Small con-solation but consolation all the same.

Tidbit 3: We may be getting Trump testimony under oath sometime soon. While Trump is intemperate and undisciplined in public, evidently he behaves himself in court. Our best guess: Trump did not col-lude with the Russians. He never put it together that Russian efforts to cozy up to campaign officials, including Don Jr., were an effort to collude. He may have known that meeting with Russians to get dirt on Clinton violated campaign law but was not told of the meeting beforehand. Don Jr. didn't know but didn't seek to find out, either. And besides, he wanted to bring Daddy a trophy.

Trump almost certainly knew that writing a false account of the June meeting on Air Force One was wrong and an effort to obstruct justice. If he didn't, the legal team spokesman resigning over this pre-cise matter would have told him. At a guess, Mueller will nail him on that alone, assuming Trump ad-mits it, but that doesn't mean he will be charged or prosecuted if Mueller deems the actions minor and due to incompetence and inexperience. There is more investigation to come, but insofar as the current issue is the campaign meeting with the Russians, it looks like Trump will skate. Do we know that meet-ing is the core focus? No. Journalists are guessing.

On the matter of mental stability, the fun news coverage yesterday was the guy who defined the term "narcissistic personality disorder" (Duke University's Dr. Justin Frank) asserting Trump doesn't have it. He's incompetent, rude, childish and a jackass. He may be dangerous to the nation, too. But it's in-sulting to authentically mentally ill people to give Trump a pass by saying he has a mental illness. Real mentally ill people are, on the whole, nice. According to the expert, being obnoxious is Trump's way of managing his anxiety. We should not" medicalize" boorish behavior. All this talk of the 25th Amend-ment is hogwash.

Americans returning from Europe say they got the stink-eye from the locals because of Trump. It looks like Trump has unwound whatever good Obama did for the US reputation in the recovery from Shrub and his war. At least Trump is not likely to start a war, if only because there's nothing in it for him.

 

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