FX traders are less inclined to freak

Outlook:

We get PPI and Feb wholesale inventories this morning, which may seem like a yawn but influences the Atlanta Fed GDPNow calculation. The repulsive Zuckerberg faces a grilling by Congress on Facebook's sale/disclosure of private information, but don't hold your breath for anything other than apologies, which the perpetual adolescent seems to think is all he needs to do.

We got befuddled by the Reuters report late yesterday that the dollar was falling because of trade war worries. Was the sentiment ride turning? After looking at the various factors, we deduced that there was a writing error. What Reuters intended to convey was that the dollar was falling because of a reduction in trade war worries, despite the possibility of Xi saying something inflammatory at the Boao summit.

Or perhaps we just read it wrong. But the error brings to the surface that the recent rise in the dollar is illogical and perverse. The country that risk recession by starting a trade war on a whim and without a long-term strategic plan deserves to see its currency fall out of favor. Bad leadership counts. This time the bad leadership is as egregiously bad as it gets.

In contrast, China Pres Xi acquitted himself well at the Boao conference, declining to rise to the Trump bait and not even mentioning Trump by name or the phrase "trade war." He committed to opening up more sectors, cutting tariffs on cars, among other goods, and favors constructive dialogue. The press can't decide on an adjective to describe Xi's speech—not "conciliatory" and not the red-hot rhetorical tone as Trump. Both the content and the tone show that Xi will not play Trump's game. Trump punches China in the face while spewing insults, and China responds with a smile and refusal to acknowledge the punch. This will confuse Trump, although of course he will claim a win because of a drop in some tariffs.

He who has a half a trillion dollar trade surplus can afford to throw a bone to the dog. Positioning Trump as the dog is brilliant.

But trade war is not the only factor. There's the Fed. Dallas Fed Pres Kaplan said the Fed has to be "gradual and patient" in raising rates. In contrast, other central banks are champing at the bit. In Europe, ECB policy member Novotny said "normalization of ECB policy should start now," even if a trade war has a negative effect on exchange rates. The Bank of England's McCafferty was openly hawkish—the BoE "must not dally over the next rate hike." This is a whisper of a suggestion that the divergence may start narrowing, and that's a dollar-negative. Even the large and rising yield advantage has failed to hold up the dollar over the past year. Imagine what can happen if the advantage contracts.

Then there is the war in Syria. Trump has no idea what he is doing. The voters liked his pledge to avoid stupid, never-ending wars we can't win, but a year ago he bombed a Syrian airfield after a poison gas episode, mainly to rattle his sword since there was little damage and no follow-through. This time "his generals" are forcing military intel down his throat and we may get a more meaningful response. Yes-terday was the first time ever Trump said anything remotely critical of Russia or Putin.

The dollar tends to rise on the US getting war-like, as we saw in the Bush years, on the classic risk aversion idea. But considering that Trump has alienated allies and botched nearly everything else, we may get a different response this time.

Trump called the raid on his lawyer's homes and office an "attack on the country." No, it's exactly the opposite—an attack on lawlessness by people who think they are above the law. It's to be celebrated. As noted above, a judge doesn't issue search warrants on the president's lawyer without heavy-duty probable cause. Cohen will likely be charged with bank fraud, wire fraud and violation of campaign finance law. He is in deep trouble, and like Manafort, the Trump campaign manager who was the target of the only other no-knock early morning search warrant, will likely be charged and face prison.

The FX market is not comfortable evaluating and judging political events. It's not as flaky and hysteria-prone as the stock market, but can appear that way when we get intra-day 100% reversals for reasons that become clear only later, and sometimes not even then. You can do perfectly good chart-reading and still get bad trades because the market overreacts to some tidbit or nugget. Conditions now are worse because Trump is a one-man dollar-negative. Did the CAD take off to the upside because of Canadian data (and we get housing today) or because there is hope for a good Nafta outcome?

After we saw the search warrant story, we looked on the charts for an FX market response. It wasn't there. Since the Syria war story was contemporaneous, that, too, was not affecting FX. What did affect rates, especially the JPY, was the Pres Xi story. In the Daily Shot, we came upon a chart prepared by Deutsche Bank, which has excellent analysis that regular folks don't usually get to see. See below. Vol-atility in the FX market was tracking volatility in the stock market over the past year, but recently is diverging. The stock market is again willing to be squirrelly, but FX traders are less inclined to freak out. Remember that volatility doesn't have anything to do with direction. We don't know how Deutsche Bank prepared this data—it's presumably based on daily data and not intra-day, but never mind. If you are wondering how you can know what's going on and still be making losing trades, the ups and downs in volatility since the election could be the explanation. Now that volatility is bottom-ing, we could be in for another trend.

Returning to the theme of a badly managed economy/country getting hosed in FX, consider the ruble:

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