Sterling will probably not hold the gain for long

Outlook:

We know uncertainty and risk aversion are high when gold takes off, and so far today it's up at a 7-week high.

We are never really surprised when the FX market turns against the dollar on the slightest whiff of nega-tivity. Never mind that the banks are in far better shape in the US than in Europe, the UK or Japan. Nev-er mind that the US has the biggest markets and most varied financial products. Never mind that the Fed is hiking while everyone else still needs QE. Never mind that there are even dumber politicians in Eu-rope than Trump—Marine LePen wants to revive the French franc for some purposes, like sovereign debt. The Economist says the only reason to revive the franc is to be able to devalue it and hose the in-vestors. France has done it many, many times before. It's what France does.

Nobody seems to notice that Trump does not have a single stance on the dollar. He complains it's too strong against the Chinese currency, but his advisor Scaramucci said in Davos that a strong dollar is not a problem when it's accompanied by rising growth—and deflationary recession (again) would be far worse. Besides, robust growth can repair income inequality. He said "if you have a deflationary specter handing over the world, you can't service debt and that will lead to a worse economic crisis than the one we just had." Aha, there's a clue. We know Trump adores debt. He thinks he's an expert on debt. Therefore, he favors high growth and inflationary policies.

Favoring high growth and inflationary policies should be dollar-favorable. It's only the confusing mishmash of contradictory and inflammatory Trump statements that works against the dollar. To the extent Trump sees the dollar as a proxy for himself, the narcissist will choose a strong dollar. But we may all collapse from fatigue before this penny drops.

We saw a sentence from an FX advisor (Econotimes) that stopped us dead in our tracks: "The dollar tumbled to a 6-week low versus the yen, as concerns over U.S. President-elect Trump's fiscal policies and uncertainty over hard Brexit boosted safe-haven assets." Six months ago a sentence like this would get laughed out of the room. "Safe-haven assets" by the pre-Trump definition was a list headed by the US and the dollar. We have been pondering the euro's inclusion on the safe-haven list as an interesting puzzle and theme for some time, ever since Grexit went away. Should we now believe that every time Trump upsets an apple cart, the dollar will fall?

We don't buy it for a minute. Remember last week's Treasury auctions, where foreign official institutions bought more of the issues, about 70%, than at any time since early last year. The dollar has not been thrown off the safe-haven list. We are going to consider the Econotimes reading as coming from an uninformed newbie. Note that Econotimes is a "news aggregator" fronting for a broker. Grain of salt.

We say the May stance is gutsy, powerful, and exactly the right way to go. EU leaders huffed and puffed about blowing the British house down for having the gall to reject it, and May says the EU will find out the house is made of brick. May's approach may be courageous or fool-hardy, depending on how much weight you put on the various elements, like the financial services "passport."

PM May is not going to Europe on bended knee and instead chooses to reject the EU before it can reject her. The so-called clean break is not a bluff in a negotiating game—May really doesn't want a "partial membership," presumably because the EU forces that seek punitive retaliation are just too overwhelming. "We do not seek to hold on to bits of membership as we leave." Instead, there has to be an entirely new type of relationship. Not a difference of degree, but of kind. If the price on controlling immigration, including immigration from the EU, is to lose any of the benefits of the single market, so be it.

European minds are boggling. Europeans pride themselves on being pragmatic and socially minded, meaning they easily rationalize surrendering to superior forces. Not to be sentimental or to overstate the case, but no European country did anything close to the Dunkirk "finest hour" rescue. This is not to say May is Churchill, but she is demonstrating Leadership with a capital L.

Sterling will probably not hold the gain for long, but the amazing rise illustrates the market's judgment that guts should be rewarded.

Weirdly, the market is capable of interpreting Trump's stupid tweets as gutsy, too. We wouldn't rule out a dollar rally on a similar scale to the one we are getting in sterling. This is not to say Trump has guts or is a good leader, just that bold statements can be interpreted as justifying a trade or two. If you don't have a reversal rule for trading, you better go get one.

Note to Readers: Remember , no morning report on Wednesday, Jan 18 due to a court date.

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