Is there a Currency war?

Outlook:

Today we get the ADP estimate of private sector payrolls, the trade report, the Markit and ISM nonmanufacturing indices, and factory orders. ADP is likely to show a gain of 195,000 jobs in April. While the markets will probably react forcefully to the ADP report as well as the final payrolls on Friday, the data is still mixed as to whether the US economy is casting aside the first quarter malaise. Economists like data (such as factory orders and trade) but market players pre-fer splashy headline numbers like payrolls.

The FT reports the Fed funds futures market is pricing in a mere 12% chance of a Fed hike at the June meeting but that might change if the Friday jobs report is good. Well, no. The Fed needs not only good jobs reports, but also a rise in household consumption and that depends to a large extent on wages rising more than they have been rising.

We feel compelled to talk about the “currency war” that Bloomberg seems to have invented out of whole cloth. Thoughtful and long-time analysts dismiss the whole thing from start to finish, but today the nor-mally sane Bloomberg reporter Mark Gilbert dredges it up again. Here’s the theory—at the Shanghai G-20 meeting, the players got together in a back room and determined that the dollar should not get too strong because it was leading the Chinese yuan to be too strong, which would lead to a destabilizing big one-time devaluation and maybe more than once.

Then last Friday the US Treasury added a “monitoring list” to its Congressionally mandated semi-annual report on currency manipulation. Technically the report is required by the Trade Facilitation and Trade Enforcement Act of 2015. The Treasury has to name those countries that meet any of three criteria de-serving of special attention. They are (1) a significant trade surplus with the US (2) a material current account surplus with the rest of the world and (3) persistent intervention in the FX market. There’s the intersection with the currency manipulation report, in which the Treasury has consistently said what Chi-na is doing is okay (whatever it is). The Treasury report names undervaluation to varying degrees, but in the absence of any “enforcement” capability, the report is just more government paper.

Five countries appear on the new monitoring list, with Germany (current account surplus) getting a headline or two over the weekend. The other countries are (no surprise) China, Japan, Korea, and Tai-wan. No country meets all three criteria, by the way. This does not pass the “so what?” test. No remedial measures are, realistically, possible. The report serves no purpose. Any economist could have come up with the list. The purpose of the Act (HR 644, Feb 2016) is to make trade more fair and to enforce anti-dumping and other measures. “It also provides unprecedented new measures to address unfair currency practices by establishing a process that directs the executive branch to confront countries that engage in such practices and to impose penalties on countries that fail to remedy these issues.”

“Confront countries”? Impose penalties? The law itself may sound forceful, but it’s vague and does nothing beyond what existing trade laws already mandate. Those laws have not stopped China from becoming the single largest producer of steel in the world, over 50% of total world output (and driv-ing both US and European producers into bankruptcy or near-bankruptcy). The US brought over 350 cases to the WTO in recent months. So what? Nothing much has changed in the bi-lateral trade data. The WTO is only marginally useful.

Currency war? Experienced traders and analysts say “bah” to that. We have no evidence—none—that governments are twisting arms on any trading floor to get the FX outcome supposedly sought. If the dol-lar is down, it’s because the Fed is cautious and a rate hike seen as postponed possibly to December. If the dollar is on the rise today, it’s because it had become oversold. Traders had as much of a position as they could tolerate and had to pare it back. This sounds simplistic but it’s a whole lot more realistic than the idea that governments are somehow behind currency moves on a secret agreement.

That implies what we are seeing today is a classic correction. We never know how far it will go or when it will end, and anyone who tells you they know the answer to those questions is making it up. Unless something big happens in the oil patch or geopolitics, we expect the correction will fizzle out like all corrections. Look at the euro on the weekly chart. Once the current move is over, it sure looks like the euro will proceed higher to (say) the 50% retracement. That’s 1.2238.

Tidbit: On the political front, Cruz dropped out of the race to become the GOP candidate, leaving Trump and Kasich. Trump has the overwhelming lead but it’s ain’t over until the convention. A key rea-son why the US has its system of electors is to prevent the mob from running amuck. We learned this in 8th grade social studies—a true democracy is a dangerous thing because tyranny of the majority would put the ignorant and the uncultured in office. The founding fathers worried about it—some wanted only landowners to be eligible to vote--and now the Republican party is worried about it. It’s doubtful they see their own obstructionism as having led to this terrible consequence. Everyone always thought it would be the disorganized populist Dems who would pose this threat.

For country club elites to be saddled with this boor is deeply embarrassing. What will they do? What would Trump do as president? First off, redecorate the White House in Elvis glitz. Trump probably can’t win the general election, chiefly because he has lost the “women vote.” But the normal distribution curve applies to female brainpower and the appeal to instinct of the alpha male. We are not so sure he can’t regain the women. After all, they are accustomed to demeaning behavior by male politi-cians. What he can never get is respect from the top-level thinkers. And what happens when a narcissist sees a lack of respect? He lashes out. Oh, dear.

 

		Current	Signal	Signal	Signal
Currency	Spot	Position	Strength	Date	Rate	Gain/Loss
USD/JPY	106.79	SHORT USD	STRONG	04/29/16	107.07	0.26%
GBP/USD	1.4476	LONG GBP	STRONG	04/12/16	1.4309	1.17%
EUR/USD	1.1479	LONG EURO	STRONG	03/11/16	1.1094	3.47%
EUR/JPY	122.60	SHORT EURO	STRONG	05/02/16	122.33	-0.22%
EUR/GBP	0.7929	SHORT EURO	STRONG	05/02/16	0.7864	-0.83%
USD/CHF	0.9568	SHORT USD	WEAK	04/29/16	0.9632	0.66%
USD/CAD	1.2768	SHORT USD	STRONG	02/01/16	1.4031	9.00%
NZD/USD	0.6888	LONG NZD	STRONG	02/01/16	0.6478	6.33%
AUD/USD	0.7466	LONG AUD	WEAK	01/25/16	0.6980	6.96%
AUD/JPY	79.74	SHORT AUD	STRONG	04/02/16	81.17	1.76%
USD/MXN	17.7656	SHORT USD	STRONG	02/23/16	18.1208	1.96%