The currency most visibly under siege is the Japanese yen

Outlook:

The minutes of the last Fed meeting yesterday came and went with barely a ripple, as expected. A few observers tried to make hay out of straw but the Fed only repeated what we already heard from Powell—the economy is strong and the coronavirus outbreak poses a still-unmeasurable risk.

Today we get the Philadelphia Fed survey, expected to show a fall-back that could offset the nice Empire State reading. We also get the usual Thursday jobless claims which we consider a waste of time. Leading indicators might be interesting as a validation of the new energy in the economy that we already know from things like retail sales.

The relative unimportance of US data means traders can think about what China is doing to get its economy back on track while it slows to a crawl. The PBOC set the Loan Prime Rate down 10 bp to 4.05% for the one-year and down 5 bp to 4.75% for the 5-year. This seems pretty skimpy. Also, the reference rate for the USD/CNY was set above 7.0, but we have no idea whether this means anything. See the chart. The recent lowest low was 6.6915 from March 20, 2019 and the high was 7.1842 from Sept 3, 2019. The retracement in between, lines not shown, is almost a perfect Fibonacci 62%, by the way.

China maybe content to let the dollar revalue gently in the hope Trump won't notice, but tigers and stripes. He is sure to begin complaining about the too-strong dollar any day now. That China is under siege from the epidemic doesn't affect his thinking one bit.

The currency most visibly under siege is the Japanese yen. The dollar high overnight was a whopping 112.19, a level not seen since last April. The move is inspired by widespread talk of recession now that GDP has come in negative and Q1 could be horrendous. Japan just had catastrophic weather last year, plus the sales tax increase, surely the worst policy idea since the ECB raised rates at the start of the 2008-09 Recession. So what happened to safe-haven flows into the home currency when risk aversion rises? Apparently it suspends itself under some circumstances and this is one of them.

Japan is the 4th largest world economy at about 8% of global GDP. China is the second largest world economy with about 17% of global GDP. Excluding consideration of powerhouses like South Korea and Taiwan, what happens to the world economy if both China and Japan fall down the rabbit hole and enter a deep recession? Economists are still beavering away to determine the effects in various other economies, but even a superficial survey shows that Germany suffers a whole lot more than the US, and the US suffers very little except for needing supply chain substitutes and perhaps some consumers having to go without the latest iPhone. To look at crude numbers, foreign trade is about 30% of US GDP but 47% of Germany's.

Here's where the sheer size of the US economy and relative self-sufficiency for core survival goods really count. Unless the virus does come to American shores—and just try to quarantine Americans!—the US economy will likely suffer the least. Safe-haven, indeed.

The dollar gain has no end in sight unless and until the virus is contained, tamed and cured. This is not impossible. Scientists do amazing things these days. For all we know, a vaccine is right around the corner. But until tapering of new cases can be proven and a treatment and/or vaccine is a sure thing, the dollar is the preferred choice. We can worry about what happens after that when we get there. It can be the case that revival of growth and optimism about recovery also favors the dollar as the only major developed economy with positive returns. It's hard to see a case for selling dollars unless some other economy steps up to the plate. Quick, who could that be?

US Politics: We suffered through the Democratic debate last evening and it was indeed awful. Everyone wanted to attack Bloomberg and some accounts say the attacks succeeded. Mayor Pete got off the best line of the night, saying the party should nominate someone who is an actual Democrat (Bernie is a self-styled socialist and Bloomberg used to be a Republican). We await new polls.

The legal defense team for Wikileaks leader Assange told the court yesterday that US Congressman Dana Rohrabacher offered a presidential pardon to Assange from US charges if he would say Russia did not provide him with the leaked Democratic Party emails. Assange is charged with 17 counts under the Espionage Act plus one more criminal charge. Rohrabacher had already admitted it to the WSJ long ago, but now the White House says he was acting on his own. This is improbable—Congressmen do not make up stuff like this--and the guy who know, former chief of staff Kelly, has yet to speak.

Today the judge sentences Roger Stone. Everyone is holding his breath to see if she follows the original Justice Dept recommendation of 7-9 years—the federal guideline--or backs down under political pressure. Stone won't go to jail just yet, because next up is a decision on whether to grant a new trial because one or more jurors were biased. Observers feel the sentence is a test of the rule of law at a critical moment when Trump is trying to overthrow it and make it a rule of man country.

 

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