Will the ECB announce a cut in QE purchases?

Outlook:

The FX market is famous for overshooting, which results in excellent opportunities to buy cheaply or sell dear. The gigantic drop in the NZD overnight is a good example. Whatever you think of pinko policies or lady prime ministers, there is nothing here to justify such a big sell-off. Get ready to buy.

Judging overbought/oversold in FX is trickier than in other markets because we are lacking a valuable tool—volume. The weekly and lagging Commitments of Traders report doesn't even come close. We have a rule of thumb to judge both trends and corrections—slope. If an upmove has a steeper slope than 45 degrees, it's unstable and certain to deliver a pullback in short order. It's a Four Esses Rule: steep slopes scare speculators. The same rule applies to the pullback. If it's too steep, it won't last. That's ex-actly what happened this week in euro/dollar. The euro slide was too steep. The dollar was certain to recover. It may be a one-time thing and the downmove may well continue, but it delivered a buying op-portunity in the meanwhile and a less-steep slope in the end.

And the downmove could be tapering because it's Thursday and traders are starting to look forward to the ECB policy meeting next week. Expectations are running high that the ECB will announce a cut in QE purchases, whether to meet a secret cap or because it really believes the need for stimulus is well and truly ending—or both. The announcement effect is to favor the euro. In the context of this long-running story, Catalonia is barely a burp.

Weirdly, announcement effects are somewhat different when it comes to sterling. Bloomberg reports such an awful set of circumstances that you'd be forced to expect a major drop in sterling. Either ster-ling already did drop on those circumstances or conditions are not as awful as reports indicate, because the pound is lurking in the shrubbery just above the last intermediate low. Tonight PM May will speak at an EU summit dinner, but Bloomberg reports "the 27 European leaders she addresses won't offer much in response. May will demand that talks move on to the future trading relationship, with-out fleshing out her offer on the contentious divorce bill, Bloomberg's Ian Wishart and Tim Ross re-port. The EU's decision on whether talks can progress will be postponed until December, and even then there's no guarantee. A senior EU diplomat, speaking on condition of anonymity, said he saw the chances of starting trade talks by year-end as only 50-50. Failure at that point would leave a narrow window for the U.K. to settle its future relationship with its biggest trading partner, and increase the risks of crashing out without a deal."

Yikes. To be fair to May, she could write a blank check to the EU tonight and the EU would still balk.

We knew from the beginning of the week that political events would dominate the news, and fully ex-pected a lot of it to be bad. In North America, the NAFTA news could hardly get any worse. The WSJ used monetary policy and Fed-watcher Ip to summarize the NAFTA situation. This is either a down-grade for Ip or a sign that the NAFTA story is going to be more important than people are giving it credit for at the moment. Ip writes that the punitive 299% preliminary tariff against Bombardier might be the beginning of a global trade war. The US is removing the peacekeepers—NAFTA and WTO—before firing the big guns. History shows that trade wars end up with everyone worse off in the end. Ip summarizes the economics profession's take on the US-instigated trade war: "This looks like a short-term win for Mr. Trump's trade unilateralism. But is it a long-run win? Mr. Trump's trade policy is based on two questionable premises. One is that deficits show the U.S. has been a loser on trade. Al-most no economist agrees, arguing trade deficits reflect a more fundamental imbalance between nation-al saving+ and investment. If U.S. protectionism hurts Mexico, its economy and currency will weaken, reducing demand for U.S. exports and undercutting any narrowing in the trade deficit.

"The second premise is that the U.S. has all the leverage because other countries prize access to its markets. Yet both Mexico and Canada have indicated they would sooner let Nafta die than accept some of Mr. Trump's conditions. In part, they believe the three economies are so integrated that many trade relationships would persist even without the pact. And in part it's because accepting an inferior deal could exact a steep economic and political price, especially in Mexico, which holds a presidential elec-tion next year. ‘It is better to have no Nafta than a Frankenstein Nafta,' says Guillermo Ortiz, who was Mexico's finance minister as Nafta took effect in the 1990s."

What is the end-game? Trump doesn't have one. Everything is an ad-hoc impulse. He just makes it up as he goes along. A moment's free publicity or distracting attention is the only goal, not the welfare of the country. Some critics are counting on the 25th amendment—to be invoked by the VP and cabinet majority to unseat a president unable to fulfil his duties. Pence is thick as two planks but the suspension is only temporary and he knows what happens to disloyal lieutenants. Besides, the amendment was crafted to take care of situations when the president is literally unable to perform, like a coma. Several experts have appeared on TV to say invoking the amendment will never work. Flip-flopping on policy issues like health care, three times in one day, means Trump is a bad governor, but not outright crazy or legally unfit.

In other political news, Trump behaved badly offering condolences to the families of soldiers lost in war. (Nobody has ever explained what the hell the US is doing in Niger in the first place.) Of course he botched it. Malignant narcissists have no empathy.

But wait, it gets worse. Trump promised a check to a Gold Star father and forgot to send it, just as he forgot to make all the many donations to charity he promised. Meanwhile, the Republican Party and left-over campaign contributions are paying for his many lawyers and lawyers for his family, but not the White House staffers being called before Congress or special counsel Mueller.

What may be the beginning of the end is a court case that had its first hearing yesterday, charging Trump with violating the Constitutional ban on "emoluments" from foreign governments. The Trump lawyer says an emolument is a gift and the hotels and clubs charge market rates, so earnings are not a gift. But the dictionary defines emolument as "salary, pay, payment, wages, earnings, allowance, sti-pend, honorarium, reward" and more. Trump volunteered to donate earnings from foreign governments to the Treasury. Sort of like the promise to send the checks to the Gold Star parent and all those chari-ties.

The suit is being brought by an outfit named Citizens for Responsibility and Ethics in Washington and started back in January. The CREW lawyer appearing on TV, Richard Painter, is a fascinating speaker, with the best case of patrician lockjaw anyone has ever seen. Two other emoluments lawsuits have been filed by members of Congress (!) and the attorney generals of Maryland the District of Columbia. Stay tuned.

Okay, we are getting a new Fed chief, more economic data, and possibly a tax bill, but again we assert that Trump is a one-man dollar negative. The fall of NAFTA alone is a reason to sell dollars, if not against the CAD and peso. The dollar should get a shove downhill as the tax reform bill dies a painful death.