Outlook: We get some important data today, including the Markit services and composite PMI, durables and some Fed speakers. Never mind. The only thing that counts in the Big Picture is the full-out trade war just started by an incompetent and clueless US president.
We have three explanations for the rising dollar, starting with re-positioning after the dollar became dra-matically oversold. Then there's the widening interest rate differential favoring the dollar, with addition-al widening on the way. The reason why these two factors are finally getting a grip—and it has taken over a year—is the rise in risk aversion generated by the Trump trade war.
For the dollar to be the beneficiary of a global economic crisis generated by its own country is illogical and counter-intuitive. The dollar should be a target, not a beneficiary. But the US is the biggest econo-my with the most liquid and varied asset markets. You can hate the US government but still need to park your money in the US. Besides, the judgment that the trade war is a major destructive force is just that—a judgment. Maybe risk aversion is rising needlessly, so jumping on the bandwagon is the oppor-tunistically correct decision that doesn't necessarily imply a judgment on the underlying events.
Or perhaps the trade war is no more than a Trump negotiating ploy and nothing all that terrible will actually ensue. The US retreated on auto components, right? And Trump declared a new Nafta deal should get done within the next two weeks and be announced at the Peru conference April 13-14. Yes-terday that viewpoint favored the CAD and peso, although perhaps those trading the peso are sharper than those trading the CAD, because the CAD is still on the rise this morning but the peso traders are having second thoughts.
The peso traders have it right. Trump has been having a ball agitating both trade partners, who dance around on his schedule and at his whim. He fancies himself a puppet-master. But it's basic stupidity to arouse a deep fury in your neighbors and allies with no good end in hand. Trump has no plan. He lacks even superficial knowledge of trade facts.
And something everybody seems to forget—Nafta is a treaty and only Congress can change it. This takes at least six months. So, no matter what bilge Trump spews between now and Peru, or after Peru, it's irrelevant. The only way to make it relevant is to believe Trump can steamroller Congress. This is becoming increasingly less feasible and after the mid-term elections in November, may become impos-sible.
Bottom line, it ain't over. We are going to get an incoherent, contradictory shambles—that is, Trump mismanagement in all its glory.
TV showmanship. Now, however, Trump has engaged an authentic enemy and one that can and will fight back.This is not to say that fixing the huge US trade deficit is not a valid goal. It is, and it's long overdue. We have been writing about this since the 1990's when the trade threat was Japan. The failure to create a plan to re-employ displaced factory workers was a fatal error and led us straight to Trump. But Trump is going about it in all the wrong ways. We may admit that the dramatic start—pretending he would tear up Nafta—was a wake-up call and good TV showmanship. Now, however, Trump has engaged an authentic enemy and one that can and will fight back.
Japan caved back in the 1990's. Run right out and get a copy of the Gary Keaton movie Gung Ho. It's a good economics lesson. This time, Canada and Mexico are caving, too. They probably think they are just engaging in the standard diplomatic talks to salvage whatever they can, but they are playing Trump's game and he keeps changing the rules, like the schoolyard bully. The macho course of action would be to walk away, throwing an insult over the shoulder on the way out. This would not be in the best interests and welfare of the Canadian and Mexican people, but it would be a better negotiating stance, or at least one Trump would understand.
Enter China. China is not caving. They started out soft, imposing tariffs on only $3 billion of US goods in response to US tariffs on $50-60 billion. This was a gift showing good will, but then Trump trampled on China, imposing new 25% tariffs on a long list of Chinese goods. China retaliated with its own plan against some $50 billion of US goods, affecting farm goods and aircraft (two of the top US exports).
The gloves are not fully off just yet. The Chinese spokesman said there is room to negotiate to avoid an all-out trade war, another softish response—the US still has double the dollar amount of tariffs against China as China has against the US.
We say Trump is not smart enough to avoid all-out trade war. His egotism and vanity—malignant nar-cissism—lead him to think he can prevail against any enemy. He may know he lacks the knowledge to handle this situation but he doesn't care. Knowledge from wussy economists and diplomats got us into this mess in the first place. Throw them and their norms away. Trump says, and probably believes, he's "the only guy who can fix this."
Trade war is not unlike a real war, or a cold one. If this is reminiscent of the military vs. the govern-ment in numerous cases, you are right. We had MacArthur wanting to keep going in Korea to take out the Chinese, and Truman had to fire him. In Viet Nam, we had political types buying into escalation while large swathes of the military were warning the West could never win. Remember that it was dur-ing Viet Nam we learned about the government lying to the public and had a politician, Nixon, who got elected on the claim he knew how to end the war and had a Plan.
During the Cold War, both sides kept escalating their military firepower and it took a revolution in the USSR to create the opening for de-escalation. There it was the unlikely figure of Reagan who seized the opportunity. Trump wouldn't know a genuine opportunity if it jumped up and bit him on the rear end—he is too busy looking in the mirror.
We eagerly await military strategists starting to pull apart what Trump is doing in the trade war in terms of classic military analysis. Just wait—we will soon be seeing quotes from Sun Tzu and Clause-witz. This is not hyperbole. War is war and if there's one area of history that has been thoroughly ana-lyzed, it's military strategy. Trump, of course, knows nothing about it. At least his favorite advisors, to the extent he has any, are "his generals."
We are placing our bet on the Chinese. They are smarter, rational, have patience and they have a Plan. You can bet they had a plan the day Trump got elected and have been refining it ever since.
As some point the dollar should get its comeuppance for having elected the jackass Trump. The eco-nomic consequences could be dire, never mind what China can retaliate with on the matter of holding dollar reserves. Fasten your seat belts.
This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.