Expect JPY and CHF to be bought as safe-havens as risk-off looms

Outlook:

The newest period of risk-off has yet to hit the FX market. We expect the Swiss franc and Japanese yen to be bought as safe-havens, and yet so far they are not demonstrating the effect. With the stock market shrugging off the trade war to focus on earnings, and Treasury yields more responsive to yesterday’s auction than to trade war, the FX market is betwixt-and-between.

Today we get producer prices, not usually a mover-and-shaker, ahead of CPI tomorrow. Again, we all know the Fed doesn’t look at CPI but still, it can reinforce the two-hikes message. We might get a clue as to how central bankers are thinking about trade war from BoC Gov Poloz. The rate hike today is fully priced in, but comments may suggest a way of looking at the effect of the trade war on an overall economic outlook. Not that the Fed takes its cues from the Bank of Canada. But if Poloz is not overly afraid of the trade war, perhaps Mr. Powell’s uncertainties are reduced somewhat, too.

Which brings up the idea of uncertainty in general. Analysts like to say uncertainty is high these days because Trump is erratic and inconsistent. But is that really the case? He is not being inconsistent on trade. He is doing exactly what he said he would do. And he is also doing exactly what he said he would do when it comes to his version of America’s self-interest in organizations like Nato, Nafta and the WTO. Never mind that Nato is the single most successful peace-seeking organization in the history of the world—72 years of peace. In the 1960’s we had a term named “enlightened self-interest” that held US moral and political leadership in the free world was worth the price of disproportionate payments. Trump has a shorter and more crass score-card based on dollars alone. To be fair, if Europe had proposed to the US that we all gang up on China, which has damaged the European economy as much as the US economy, the situation would be different today and the US would not be targeting allies as well as enemies. This is the sense in which we can blame lack of leadership in Europe for US misfortune in getting Trump. Just a thought.

If we don’t really have uncertainty about what comes next in the trade war, perhaps we shouldn’t worry about capital flows or financial market disruptions generally. That may mean we can go back to viewing the US as first in normalization, growth  and probably inflation, with a Fed poised to respond appropriately. The dollar “should” benefit (as long as yields don’t crash).

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