Political events hardly ever move the currency market

Outlook:

The dollar may get a reprieve but we may have to wait until Friday's retail sales to be sure. Even, then, evaluating the effect of the data will be tricky because the following Monday is a national holiday in the US, Martin Luther King Day. Markets will be closed. And Trump is inaugurated on Friday of that week (Jan 20). And before US retail sales on Friday, we get the minutes of the last ECB and BoE policy meetings.

We have two themes: political interference with the usual course of FX developments, and central banks in some disarray.

We have long noted that political events hardly ever move the currency market. Impeach Clinton and the dollar didn't burp. Japan has booted out prime ministers and the yen doesn't care. But maybe it's different this time. Quartz reports "Fiat Chrysler joined the stampede to invest in the US. In the wake of Trump's threats to increase taxes on imported cars, the company said it will put $1 billion into its Mid-west plants and create 2,000 new jobs. Ford last week ditched plans for a plant in Mexico to invest in a Michigan factory instead, Volkswagen and Daimler announced multibillion-dollar investments in US production, and Volvo's going to build its first-ever US plant." Okay, maybe a drop in the ocean but the guy hasn't even been inaugurated yet.

Another political effect is not so nice. Reuters reports a Chinese state tabloid warned Trump, "End one China policy and China will take revenge."

We also have a political event in the form of Brexit. Sterling fell to the lowest since October when PM May repeated that her priority is regaining control over immigration and law-making without interference from the EU. We already knew that. She has said "Brexit is Brexit" more times than anyone can count, so the big effect on sterling this time is a bit of a puzzle. It implies that up to now, traders believed May would go on bended knee, i.e., chicken out. We should also consider that May is bluffing, although probably not. The Scottish PM lambasted the UK for failing to publish a guidebook.

May persists in saying a good trade deal will be at the heart of the new relationship and she doesn't accept the soft vs. hard Brexit concept. And yes, she plans to start official exit talks by end-March. We suspect she plans to burn the barn down before then and challenge everyone to a barn-building party. We already have some plans to substitute tariffs and subsidies for lost exports.

Another political effect can be seen in Turkey, where the lira's decline leads the EM currencies and in part because of Erdogan's behavior. In South Korea, the won fell over 1% overnight on mostly political problems—the crony capitalism scandal, the conflict with Japan over comfort women (Japan recalled its ambassador and suspended currency swap talks) or even the threat of a nuclear attack by North Ko-rea.

But let's get back to our fundamentals, and top of the list is interest rates and yields. Here we have con-fusion and disarray. Yields should be higher on the earnings component of the payrolls report. They are, but not by much. Bloomberg reports that at the American Economic Association meeting over the weekend, three possible successors to Yellen all criticized the Fed for "trying to do too much and sug-gested rates would be higher if they were in charge." The three include Glenn Hubbard of Columbia University and John Taylor and Kevin Warch from Stanford. The point is not big-shot economists crit-icizing the Fed. It's that the market will now consider Yellen a lame-duck Fed chair. This can't be good for market stability.

Meanwhile, Harvard's Rogoff (co-author of the splendid This Times Is Different) and U Chicago Rajan told the WSJ the Fed should get cracking. Rogoff said "The Fed will tighten three times, they might even tighten four times" and "still be behind the curve." Rajan says the "normal rules of economics will start playing out again," meaning higher inflation. Rogoff acknowledges the Fed has its back against the wall. "The Fed will be extremely reluctant to aggressively tighten given that it is fighting for its independence. They are worried they'll come under more assault." But an offset is that "Trump's in the construction industry; he has to believe in the power of low interest rates."

Now consider the European situation, because the yield number doesn't exist in a vacuum, but rather only in comparison to competitors. Deputy FinMin Spahn said Friday it would be prudent to start pre-paring for the exit from extraordinary measures. The German Bankers Association was quick to pick up the thread and demand the ECB to start "a very careful change in policy direction."

If US yields are rising but German yields are rising pari passu, the dollar doesn't get an advantage. This is why we care about the ECB minutes. We might even get some fresh comments from Draghi. We are worried about taper talk supporting the euro, however distant the prospect. Draghi would have to come down hard on it.

The other idea to contemplate is Rogoff and Rajan making the assumption that normalization doesn't take any more time. The second hike, delayed a full year or not, marks the end of whatever normaliza-tion process was needed. Normalization is here. Get on with it. We haven't really given much thought to this idea before and at a guess, neither has anyone else.

Bottom line, it's now a battle between rising yields and whether the US can hold and enlarge the differ-ential.

Tidbit 1: Bloomberg challenges The Economist's Big Mac index that shows the dollar 60% over-valued against the yen and 30% against sterling. A Starbucks tall latte, however, has the dollar only 10% overvalued against the yen and 25% against the pound. Pizzas (Dominos) are harder because of different sizes, but Bloomberg comes up with the euro 50% undervalued.

Tidbit 2: The FBI arrested a VW executive for "conspiracy to defraud the United States," a crim-inal charge. The exec was in charge of regulatory compliance in the US and is charged with lying about emissions as only a technical problem. The NYT reports "Volkswagen eventually said that it had fitted 11 million diesel cars worldwide with illegal software that made the vehicles capable of defeating pol-lution tests." This may be the proper use of the law, but honestly, all those people who voted for Trump would have preferred the FBI arrest the bankers or the rating agencies for "conspiracy to defraud" in the subprime mortgage business that nearly brought down the US economy.

Politics: Pres-elect Trump has started lying to the American public again. He said the intelligence agency report states the hacking of the Dems did not affect the election outcome. The report doesn't say that. It says the agencies didn't make an assessment. He also said the hackers didn't hack the Plubs because their defenses were too good. This is also contradicted by the report. Before Trump's meeting with the agencies, he referred to the meeting as "delayed." This is not true. It was always scheduled for Friday.

Three lies in a row on one day about a single subject. For the second weekend in a row, the political commentariat was as outraged by Trump's lies as by Russia's interference with the US election and undermining confidence in US institutions. Why would Putin prefer Trump? Two reasons: Trump is a jackass who can be manipulated. Secondly, Putin was angry when Secy of State Clinton repeated, to Congress and on TV, the conclusions of the Organization for Security and Co-operation in Europe (OSCE) about the 2011 Russian election, which was fraught with fraud, ballot-box stuffing and other shenanigans. Putin claimed the ISCE may have been the source, but Clinton gave the "signal" to Rus-sian protesters. In in end, Putin won by the skin of his teeth, even with massive cheating. Bottom line—Putin wanted to harm Clinton. The Plubs say Clinton was going to lose anyway by repelling voters with corruption (making millions from speeches), disregard for the rules (the server), and failing to promise jobs. This may be true but not the main focus, which is a foreign government trying to interfere in an American election, whether it worked or not.

Then Sunday night, Trump lied again. In response to Meryl Streep saying it was heart-breaking to see Trump mock a handicapped reporter for his handicap, Trump denied he had done that, tweeting "I did no such thing." Yeah, he did. It's on tape.

Note to Readers: Market are closed next Monday, Jan 16, for a holiday. Also, the following Wednesday, Jan 18, there will be no morning report. Court date.

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	117.04	SHORT USD	WEAK	01/05/17	115.93	-0.96%
GBP/USD	1.2162	SHORT GBP	WEAK	12/16/16	1.2444	2.27%
EUR/USD	1.0519	SHORT EURO	WEAK	12/10/16	1.0605	0.81%
EUR/JPY	123.11	LONG EURO	STRONG	11/03/16	114.30	7.71%
EUR/GBP	0.8649	LONG EURO	NEW*WEAK	01/09/17	0.8649	0.00%
USD/CHF	1.0191	SHORT USD	WEAK	01/05/17	1.0113	-0.77%
USD/CAD	1.3253	SHORT CAD	STRONG	01/05/17	1.3253	0.00%
NZD/USD	0.6970	SHORT NZD	STRONG	12/19/16	0.6963	-0.10%
AUD/USD	0.7317	LONG AUD	STRONG	01/05/17	0.7343	-0.35%
AUD/JPY	85.63	LONG AUD	WEAK	10/06/16	78.48	9.11%
USD/MXN	21.3277	LONG USD	STRONG	10/31/16	18.9054	12.81%