Outlook:

For the dollar to take a bath on two bad data points is rare, especially when we have trade war angst at the same time (that is normally dollar-positive). The dollar downmove was across the board, against every currency, and inspired talk of a key reversal point.

We are not going to quibble about the key reversal idea (see Technical Analysis for Dummies), but you don't need to buy into it to see that an Event has occurred. The question becomes whether you embrace the new direction and fade the trend, or keep the faith that the existing trend direction was correct and will resume.

This morning it looks like euro/dollar traders scared themselves and we are getting no action. The one currency that could plausibly deliver the reversal is the AUD. As expected, the RBA stayed on hold overnight and adopted the wait-and-see stance, but traders responded as though a cut had been forecast and they were rescued from it. This means bulls were waiting in the wings, possibly encouraged by better Chinese data.

Trump's threats about the "champagne tariff" on France, a new eurozone tariff because of Airbus, and sticking to the Dec 15 tariffs on China are all a function of a tired old man going back to familiar territory. Trump used tariffs before to get attention and pretend to keep campaign promises (despite no new jobs appearing), and what would normally be obviously a big fat economic negative failed to harm the stock market, Trump's personal polling machine. Now Trump is the third president in history to face impeachment—Nixon resigned before he was impeached—and that weighs on him. We always expected he would lash out under impeachment pressure and that's exactly what we are getting. We need to expect ever more outrageous words and deeds. The question is whether they suddenly become toxic to the dollar, in contrast to what we have had for most of the year.

We should worry about retaliation. So far US trade partners have been shocked into silence. Now we have the Chinese saying it's looking at a list of "unreliable entities" that would be sanctioned, prominently featuring US companies. France said that if the US imposes tariffs on its goods, mostly consumer goods, in response to a 3% "digital tax" on mostly US high-tech companies, it will retaliate. (Meanwhile, Macron played Trump by calling NATO "brain dead," inspiring Trump to defend it. Clever!)

Retaliation comes in a political form, too. Not only is the US interfering in Hong Kong, a new bill would sanction Chinese officials for abuses of the Uighurs. Will other countries start sanctioning the US for political reasons—the Muslim ban, for example? Escalation along these lines could take us back to the 19th century.

This week is going to be just awful. Look forward to payrolls at the end of this week, expected to be fairly robust and in line with recent figures. But returning to "normalcy" ain't gonna happen. Talk of some countries just starting to go fiscal to address the global slowdown is going to take a back seat. Stock markets are—perhaps--not going to deliver the usual Santa Claus rally. We don't like to take clues from equities but that's the place to look.

Politics: Today the House Intelligence Committee will release its report to the public and the Judiciary Committee. Gird your loins. It's going to be a humdinger. We will get the article of impeachment in a week or two and the full House vote before Christmas. At a guess, bribery will be the first article of impeachment and obstruction of Congress will be the second point. Trump's denial that impeachment is a proper, legal, constitutional duty of Congress is in line with his disrespect for convention and institutions. It remains to be seen whether the Trump base really wants a president that goes this far.

 


 

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