Is getting rid of Trump dollar-favorable?

Outlook:

You can’t believe any explanation of why the dollar is stronger when the conventional reasons for dollar firmness took a nosedive. In recent months the dollar has had a habit of rising on a rise in anxiety, mostly over the trade war. Yesterday trade war fears abated considerably, but the dollar did not retreat as it “should.” Alternative explanations, like new home sales, are not credible. 

Maybe traders don’t believe the purportedly good news on trade. After all, Trump lies and changes the narrative on a whim, which is almost certainly what he did yesterday. He seems to think that being erratic keeps the opposition on its toes. He’s wrong. All it does is convince the opposition he’s a fruitcake and not to be trusted, meaning any deal will not carry contractual weight.

The Ukraine story backs up the point of view that the US is not to be trusted in a contract. Ukraine surrendered nukes and got a US commitment of military aid in return. It was a deal. Then Trump complained the US was giving Ukraine a lot of money but getting nothing in return, so how about a little dirt on a political opponent? He is being impeached for this, but not because the US was seemingly breaking its nukes-for-aid deal. The press is failing to focus on this, fascinating as the impeachment discussion may be.

Just because we can’t find an explanation for the dollar’s rise using our most recent set of factors may lead to the idea that it’s the prospect of impeachment doing the job. In other words, getting rid of Trump is dollar-favorable. Bloomberg chooses to report this point of view and cites the RBC Capital Markets chief strategist: “Shorter-term, we would not be surprised to see markets trading rising risk of Trump’s removal as USD-positive.”

Don’t go down that road. For one thing, FX traders are leery of trading on political events. We do see it, as in the case of Grexit and Brexit, but it’s rare and has to have a direct link to currencies. In Grexit and Brexit, the fate of the euro was very much at the forefront of the political issues.  We have also seen a Japanese prime minister ousted for corruption and the yen not move an inch.  (We added the Reuters chart showing the S&P and dollar index while the Clinton impeachment was unwinding—see the Keeper Chart pages.)

For another thing, it’s nearly impossible that if the House votes to impeach, the Senate would convict. And even if the Senate were to convict, removal is yet another matter. We are perhaps 1% of the way to getting rid of Trump, and anyone who watches cable TV and reads the mainstream press should know that. The only way to get rid of Trump is for him to lose the 2020 election. And in our experience, FX traders do not position today for an event over a year away. 

Besides, Trump has been, on the whole, the chief cause of dollar strength. Yes, we have the yield advantage and an economy better able to bounce back from setbacks, even those manufactured in the US, but it’s Trump driving the dollar up. He says he wants a weaker dollar to promote exports, but has behaved in such a way as to drive the dollar up. Remaining Disrupter-in-Chief is more important to him than getting the weaker dollar, although we might suppose his efforts to drive interest rates down and attacks on the Fed is a weak-dollar initiative. That would be to assume Trump possesses a modicum of knowledge and a general outline of how things work, and we are not sure that’s the case.

In any case, who is to say that once Trump is gone, assuming the election throws him out, that the dollar goes up? For one thing, if Trump is out, the winner is by definition a Dem, and the dollar tends to fall on a Dem getting elected. Historically that has been due to the idea, often wrong, that Dems are the overspenders, raising the national debt, or the overtaxers, punishing companies and the rich with a drop in capital spending the result. This is not true—the only president in the last 50 years who cut the deficit and delivered a budget surplus was a Dem (Clinton), but never mind. Electing a Dem as president is virtually certain to be dollar-negative.

So, if we want to connect Trump to the rising dollar, it has to be because FX traders expect—with high confidence—some new disruption that raises fear and anxiety. Probably something to do with the trade war but also possibly something from left field. Talks with China resume in October and Trump has told us to expect the auto tariffs to come in November, but Trump lies, so something could come this week, especially now he needs a distraction from impeachment.

We find this idea—expectation of a Trump blow-up—to be reasonable and in keeping with what we know about this guy’s conduct. Otherwise, that leaves month-end and quarter-end as the only conventional reason we can find for the dollar to be firm, and that’s just plain boring.

Meanwhile, the NY Fed finds it necessary to keep intervening in the repo market. The WSJ and Bloomberg both report the new amount today will be $100 billion. Yesterday banks sought over $90 billion but the Fed had only $75 on offer. The Fed also announced a doubling of the 14-day repos to $60 billion. We still think it’s a minor glitch in the grand scheme of things—a dollar shortage? Gimme a break—but we can be wrong. How it affects the FX market is even less clear.

Today the news includes the third reading of Q2 GDP and wholesale inventories, something only the nerdiest of economists looks at. August pending home sales might be interesting. We also get speeches from six regional Feds. But all eyes are on the politics. As things worsen for Trump, expectations of a blow-up rise, favoring the dollar.

Politics: Trump is hoist on his own petard by releasing the phone call memo that clearly shows him trying to extort dirt on Biden in return for foreign aid. For impeachment purposes, the extortion is secondary, although icing on the cake. The cake itself is seeking personal political advantage from a foreign leader. This alone suffices for impeachment, as the rising number of Dems supporting impeachment shows. Last week the number was 135. This week it’s one vote from the majority needed at 218 votes.

We have testimony from intelligence big shots today and the release of the whistleblower’s letter that is sure to leak. Congressmen who have read the letter, both Dems and one Plub (Romney), emerge from the secret reading room in state of shock. It’s evidently worse than we think and goes far beyond the Ukraine story we have so far. 

It’s not impossible that the Republican-led Senate can change its undying support for Trump and switch sides. This is what happened in the Nixon case, although it took over a year. In the end, it was Republicans who went to Nixon and told him he must resign because if the House passed articles of impeachment, the Senate would convict. This time we can’t identify the Republican leader who would play the Goldwater part. Is there anyone who could convince Trump he should resign?

Before things get that far, next week we will get the Trump tax returns. A judge postponed the decision from tomorrow to next Wednesday, but there is a limit to the delays, not only because of the constitutional issues but also because of a statute of limitations.  Trump’s lawyers claim no president can be indicted while in office, which is not proved.

Stonewalling can’t work indefinitely, can it?

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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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