Outlook:
For what it’ worth, we get the Empire manufacturing index today, the home builders index, and TICS.
The ECB’s holiday conference in Sintra, Portugal, may deliver some salient remarks about central banking in general. Remember the Fed is on a one-year exercise to revise its position on the Fed’s role and communications strategies. Powell and Bullard are attending, along with Former Fed Yellen and TreasSec Summers. RBA chief Lowe and BoJ chief Kuroda will be there, too. The Sintra theme this time is “Price and Wage-setting in Advanced Economies.” What better subject?
The Fed’s policy meeting this week will be the subject of much speculation. On the existing data, there is no need to cut rates. Retail sales are okay, up 0.5% in May after 0.3% in April, if missing the 0.6% forecast. Industrial production rose 2% after 0.9% in April. Recession? What recession? Aside from that aberrant payrolls report, the US economy is doing okay, or a little better than okay. And we get a series of housing-related data this week, starting with NAHB sentiment today, May housing starts tomorrow, and existing home sales on Friday. With mortgage rates falling, the housing data could well be pretty bright, too.
There may be no need for a rate cut but markets have fully priced in cuts, anyway. Bloomberg likes an economist named Tim Duy at the University of Oregon, who says the Fed will drop the word “patient” and insert the phrase “sustain the expansion." Besides, it’s not the level of employment that counts, it’s the pace at which employment grows that affects inflation. With steady growth, no wage inflation and thus no overall inflation. This is the outcome of a Canadian study. Without even reading the report, we blow a raspberry at extrapolating anything resembling an economic principle from Canadian data. Size counts.
We like the Professor’s judgment about changing the forward guidance to “sustain the expansion.” It’s a splendid excuse to do what the Fed must do, anyway, to appease the Bully and the stock market. We expect no change this week but some interesting additional language about a cut at the end-July FOMC. If this becomes the new conventional wisdom, the Fed can fall back as a driver of currency effects, leaving risk aversion front and center. Since we can hardly expect Trump to retreat on trade—alea iacta est—that implies a firm dollar. The euro will rebound today as usual after a big fall last Friday, but that’s just short-term and mostly technical stuff.
Somewhat strangely, the big news everyone is going to miss is Deutsche revising its structure in a massive way, shutting down its US trading operation and forming a bad bank to hold its non-performings and a giant portfolio on long term derivatives. The FT reports “Managers are also set to unveil a new focus on transaction banking and private wealth management.” Yeah, and it did so well banking for Trump (he defaulted four times). The contrast with the US could not be starker. This week we get the results of the latest stress tests. Even with the Fed easing back on the regulatory brakes, the big eleven US banks are in okay financial condition and able to weather a storm, even if nobody really sees a storm forming. The financial markets and general public don’t register the stress tests on their radar, but it’s still an underlying strength of the economy.
Tidbit: Fareed Zakaria says Trump is squandering the US status as top dog by abusing its power. Leaving the Iran nuclear deal and imposing sanctions on Iran and its trading partners is a case in point. Evidence lies in Germany spearheading the Instex payment system that will disguise European purchases from Iran by sidestepping the dollar. It’s the first step in de-throning the dollar as the chief numeraire and reserve currency.
We never miss Zakaria’s TV show on Sunday morning but he’s got the wrong end of the stick here. At least he admits Instex “will probably fail or prove to be inadequate in the short term.” The acronym stands for “Instrument in Support of Trade Exchanges,” which is a meaningless name if we ever saw one.
As a sanctions workaround, there is no reason why Instex can’t work perfectly well. It just has to substitute for Swift, the global clearing house, with the same efficiency, reliability and accuracy. Granted, for the Europeans to gang up with Iran against the US Iran is a political statement of independence from the US. But Instex is little more than applying computers to a barter system--as long as Iranian buyers want about the same amount of stuff from Europe as Europeans wants from Iran, okay. It can be priced in any currency, including dollars, just without any actual cross-border flows.
But as a threat to the dollar, no. For one thing, there is no new currency. Instex transactions will still be denominated in dollars, euros, pounds, and maybe yen.
And more important, nobody else will be joining. Instex is a special purpose clearing house for trade only between Iran and Europe, or rather the European countries participating. We are unclear on whether peripheral European countries get to use it, too. What is Poland’s status? It belongs to the eurozone but this is not a eurozone initiative and the ECB has no role, as far as we can tell. Anyway, the point is, let’s say Iranian participants want to trade outside Instex. They can’t use their Instex credits to buy, say, oranges from N. Africa. And the success of the venture depends on Iran not getting naughty with financing terrorism, money-laundering or other financial crimes. Given desperate conditions, who can say they will obey European rules? And how do you police them, anyway?
The whole point of both a numeraire and reserve currency is that it’s the merchants who decide what currency to accept and hold. Government force merchants to fork over foreign currencies to be able to buy food or weapons in a pinch, and historically, they accept the merchants’ judgments on which currency will hold its purchasing power and have adequate liquidity in an emergency (not to mention being safe from capital controls). The nature of the clearing system has nothing to do with those characteristics. The dollar is still top dog for merchant acceptability and will not lose any status.
Besides, as soon as they get it up and running, Trump will likely be out of office and Instex will not be needed. And it may be too late, anyway. Iran announced it’s going to exceed its uranium stockpile limit in 10 days, the cap set in 2015 as part of the nuclear deal. Trump pulled out of the deal because, he said, Iran was violating the cap, but that was not true. Now it will be, unless the Europeans revive trade with Iran. That’s according to the Iranian atomic agency spokesman Behrouz Kamalvandi, as reported in the WSJ. Previously Iran had given Europe until July 7 to get trade rolling again. The ultimatum doesn’t mention Instex by name, but it doesn’t have to. Europeans don’t like operating with a gun to their head but at the same time, check the map--Iran is a lot closer to Paris than to New York. In a strange way, Trump is forcing the Europeans to take leadership on an international stage, probably not such a bad thing (if they pull it off). This is what weakens the US position, not Instex itself.
Fun Tidbit: Trump fired his polling companies because he didn’t like the results, definitely the behavior of a stable genius. The story unfolds with ABC News getting the internal poll numbers from the re-election campaign showing Dem Biden winning over Trump in 15 of 17 key states. Then Fox News, the Trump sycophant, released a poll yesterday showing 50% of voters think Trump did collude with Russia in 2016. It was 44% in March, so the Mueller report did have an effect, after all. Also, 50% support impeachment. Here’s the problem—the Fox poll covers a mere 1001 persons and has a 3% sampling error.
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.
To get a free trial, please write to [email protected] and you will be added to the mailing list..
This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.
Recommended Content
Editors’ Picks
EUR/USD trades weak below 1.0800 amid Good Friday lull, ahead of US PCE
EUR/USD remains depressed below 1.0800 after soft French inflation data, amid minimal volatility and thin liquidity on Good Friday. The pair keenly awaits the US PCE inflation data and Fed Chair Powell's speech for fresh hints on next week's price action.
GBP/USD holds steady above 1.2600 as markets stay calm on Good Friday
GBP/USD trades sideways above 1.2600 amid a typical Good Friday trading lull. A broadly firmer US Dollar could keep any upside attempts limited in the pair ahead of the US PCE inflation data and Fed Chair Powell's appearance.
Gold price sits at all-time highs above $2,230, US PCE eyed
Gold price hit all-time highs at $2,236 on Thursday to finish Q1 2024 with a bang. Most major world markets, including the US are closed due to Holy Friday, leaving volatility around Gold price highly subdued. US PCE inflation and Powell are awaited.
Jito price could hit $6 as JTO coils up inside this bullish pattern
Jito (JTO) price has been on an uptrend since forming a local bottom in early January. Since then, JTO has revisited the key swing point formed in early December, suggesting the bulls’ intention to move higher.
Key events in developed markets next week
Next week, the main focus will be inflation and the labour market in the Eurozone. We expect services inflation to be impacted by the easter effect, while the unemployment rate to be unchanged.