The FX market is abnormally jumpy

Outlook:

The euro put in a large upmove yesterday on the Fed minutes that was almost entirely erased today on anticipation of the ECB minutes. We can't recall central banks minutes having such a big effect. Besides, in both instances the market is getting exactly what it expected to get—in the case of the Fed, two camps on inflation. No surprise. We don't have the ECB minutes yet but the euro fell, and hard, on the expectation that the Executive Board declined to talk about tapering, exactly as Draghi told us at the time of the meeting. So why the overreaction?

Ahead of the ECB release, a number of asset prices fell, including equities and the euro itself, in anticipation that the minutes will say, again, that markets should not expect a tapering announcement. Draghi's schedule is being pored over, including a speech in Germany on Aug 23 and then another at Jackson Hole. Deutsche Bank chief economist Wall told the FT "Draghi cannot afford to be as ambivalent about the euro's appreciation as he seemed at the July press conference." Wall thinks the ECB chief "could well deliver a ‘throw away reference' to the climbing exchange rate in either of the two speeches to suggest that the euro is ‘important' to growth and inflation.'"

This reminds us of Trichet's verbal intervention several years ago when he described the euro's rise as "brutal." Draghi is far more clever and nuanced. If he is going to complain about the euro, it will take a few minutes after he speaks to grasp his point. Then there is the issue of over-positioning ahead of the statement. A 100-point drop seems excessive on news that we already know. Draghi said of the meeting that the members did not discuss tapering. So why sell off the euro in anticipation of being told what you already know? We don't get it. Something else must be going on.

In economic news, we get the usual jobless claims and some other data today, but let's not neglect the Atlanta Fed's GDP update yesterday—a whopping 3.8% (from 3.7%) for Q3, based on the residential construction data yesterday. We have to wait until next Friday (Aug 25) for the next update. The Atlanta Fed is usually far ahead of everybody else and gets a higher GDP growth rate than the actual turns out to be. But what if it's right? The Fed may end up behind the curve.

We like charts and we like the trends they disclose. Right now the euro chart indicates a pullback to the downside—unless the ECB announces it will start tapering, perhaps offset by Draghi complaining about a too-strong euro. Only one thing is clear—the market is abnormally jumpy. And not just the FX market. Yesterday the EIA announced a giant drop in US oil inventories and the oil price fell, exactly the opposite of what usually happens.

Everyone is upset and emotional about something and it shows. The US losing international respect and esteem, and its own self-esteem, could well be the culprit. Destructive forces are at work. It's scary. Trump advisor Bannon wanted to tear down the infrastructure of government and other big institutions in a near-anarchic mode. Granted, the voters voted for disruption. But we doubt they voted for destruction.

Tidbit: The NYT reminds us that August 2007 marked the beginning of the worst financial crisis since the Great Depression. Hardly anyone went to jail. The ratings agencies are still in business. What did we learn? With Trump and Walls Street wanting to peel back Dodd Frank, not much, apparently. Nobody is writing about moral hazard anymore. That doesn't mean it's dead.

US Politics: The outpouring of anger and disgust at Trump finding "some nice people" among the Nazis and equal fault on the side of anti-racist protesters is gratifying to those of us who believe in American ideals and American law. There are no "nice people" among the Nazis. Hitler loved his dog, too. Fun tidbit: Trump's father was arrested in 1927 alongside dozens of KKK men in Queens. He was released without charge and may or may not have been a Klansman himself. But Trump's usual excessive denials indicate he knows that being associated with the Klan is not acceptable.

As a sign of deep social change, so many big company CEO’s were pulling out of the president’s two  advisory panels that Trump closed the panels down to avert embarrassment. This is a bigger deal than it  seems on the surface because Trump is not their equal - he has never run a public multinational corporation accountable to shareholders (and they have never declared bankruptcy four times). Trump craves their respect. Yes, some of the CEO’s probably did it to avoid a boycott, but usually the boycott comes first. It’s a top down gesture that shows the social values fought for in the 1960’s really did take root.
Labor union leader Trumka said “Unfortunately, with each passing day, it has become clear that President Trump has no intention of following through on his commitments to working people. More worrisome, his actions and rhetoric threaten to leave America worse off and more divided.”

Another group from whom Trump (the draft-dodger) seeks approval is the military, but they also rejected his stance. Yesterday it was Chairman of the Joint Chiefs Dunford. He said "I can absolutely and unambiguously tell you that there is no place for racism and bigotry in the U.S. military or in the United States as a whole." Earlier, the top guys at the Navy, Army and Marines had made similar statements. Dunford said all these denials are important. "They were speaking directly to the force and the American people."

Bravo.

But those cowards in Congress refuse to see the light, or rather refuse to say they see it because they think they might need Trump to get re-elected. Craven is the right word. Not a single Republican sena-tor would go on a single TV show to discuss the president's position. Many Dems and a few Republi-can House members showed up, but not the speaker of the House. We thought Clinton made a mistake calling a big slice of Trump supporters "a basket of deplorables," but just watch the Virginia skirmish and listen to the white supremacists talk— deplorable is exactly the right word. A KKK couple said they didn't mind the young woman protester getting killed because she was an anti-fascist communist.

And we thought all that nonsense ended with McCarthy.

Republican strategist Schmidt, who is smart and sane, says this is a turning point in American public life. We have to come out of it with an even better appreciation and application of equal rights. There is really only one way to do that, and it is to vote the bums out. Now if only the Dems could become co-herent for more than five minutes.

Well, there is another way—impeach Trump for self-enrichment or whatever Mr. Mueller can come up with. That leaves us with that dimwit Pence, but anyone would be better than Trump. Literally. Hillary was annoying as hell but see how good she looks now. We would still be kvetching, but about some other far more minor thing.

And it's not just Trump's words ripping us apart. It's also his policy actions, including more harshly criminalizing drug offenses, at the same time as paying lip service to the need for government to tackle the opioid crisis. The man's a train wreck.

In an interview with a magazine named The American Prospect, Trump advisor Bannon—the guy who invented the Alt-Right concept—said yes, of course, racism is unacceptable. But it's okay if race takes over the public airways. Bloomberg reports he said "The Democrats, the longer they talk about identity politics, I got 'em. I want them to talk about racism every day. If the left is focused on race and iden-tity, and we go with economic nationalism, we can crush the Democrats."

This is probably the most important statement of the week. Note that it was Bannon who called the magazine.

On another topic, and one that gets front page treatment in the FT, Bannon says the US and China are in an economic war. "One of us is going to be a hegemon in 25 or 30 years and it's gonna be them if we go down this path... If we continue to lose it we're five years away, I think, 10 years at the most, of hitting an inflection point from which we'll never be able to recover."

Here's the kicker—China responded. The foreign ministry issued a statement that the relationship is "mutually beneficial" and there is "no winner from a trade war. "We hope that people will not use 19th and 20th-century perspectives and measures to address 21st-century problems."

Bannon is fighting Treasury chief Mnuchin and chief economic advisor Cohn to get drastic action against China. As for North Korea, Bannon says it's a sideshow. There is no military solution that doesn't entail 30 million South Koreans getting killed in the first 30 minutes. Pressuring China to help with N. Korea is a waste of effort. North Korea has got us in a grip and China can't pry it open, so we might as well fight the real fight, which is against Chinese hegemony arising from their winning the trade war.

Bannon is supposed to be a smart guy with an Ivy League education, but he should know that the hegemon is not the one with the bigger trade surplus. It's the one whose currency is used as a reserve currency. And reserve currencies are selected by merchants and governments for the ability to use them to buy food and armaments at any moment, aka liquidity. What provides liquidity is not only a suffi-cient money supply, but also the rule of law and the primacy of contracts. Governments prone to arbi-trary currency restrictions and without free market pricing for interest rates as well as currencies simply do not qualify. Read Chapter 11 in our book with Vicki Schmelzer, The FX Matrix.

Currency	Spot	Current Position	Signal Date	Signal Strength	Signal Rate	Gain/Loss
USD/JPY	110.07	SHORT USD	07/19/17	WEAK	111.96	1.69%
GBP/USD	1.2881	SHORT GBP	08/11/17	WEAK	1.2961	0.62%
EUR/USD	1.1712	LONG EURO	06/28/17	WEAK	1.1218	4.40%
EUR/JPY	128.92	SHORT EURO	08/14/17	WEAK	129.40	0.37%
EUR/GBP	0.9092	LONG EURO	04/25/17	STRONG	0.8490	7.09%
USD/CHF	0.9670	SHORT USD	08/10/17	WEAK	0.9655	-0.16%
USD/CAD	1.2639	LONG USD	08/11/17	STRONG	1.2730	-0.71%
NZD/USD	0.7305	SHORT NZD	08/11/17	STRONG	0.7275	-0.41%
AUD/USD	0.7931	LONG AUD	08/17/17	NEW*WEAK	0.7931	0.00%
AUD/JPY	87.30	SHORT AUD	08/07/17	STRONG	87.66	0.41%
USD/MXN	17.7227	LONG USD	08/07/17	WEAK	17.8507	-0.72%
USD/BRL	3.1528	LONG USD	08/11/17	WEAK	3.1751	-0.70%