Favorable winds for the US Dollar as Catalan concerns grow in Europe

Outlook:

US data is pretty good so far going into payrolls, with today bringing factory orders and the trade report. Several Fed speakers are scheduled, including Powell, the presumed front-runner to replace Yellen. It's not clear that the payrolls report will get a pass because of the hurricanes. A bad number is still likely to cause a spike down in the dollar, whereas a better-than-expected number may not provide a boost.

Longer run, as the FT writes soberly, "Friday's jobs data are not expected to alter the outlook for a De-cember rate rise from the Federal Reserve, even if they undershoot forecasts. It is thought likely that the US central bank will discount the impact on the data of the hurricane season."

On the dollar's side is the Fed and upcoming rate hike, even if it's two months away. Against the dollar is the president, a one-man dollar negative, talking about pushing Peurto Rico into default. From the guy who went bankrupt twice and doesn't respect creditors, we hear that Trump intends to "clear" Puerto Rico's $74 billion in debt. Trump's exact words: You know, they owe a lot of money to your friends on Wall Street, and we're gonna have to wipe that out. You can say goodbye to that. I don't know if it's Goldman Sachs, but whoever it is, you can wave goodbye to that."

Not unreasonably, the bond market heard "default" and freaked out. Never mind that a large proportion of PR bond-holders are PR citizens and not Wall Street denizens, or that insurance and pension manag-ers are the ones who buy bonds.

Budget office chief Mulvany tried to dial it back, saying "I wouldn't take it word for word with that." In other words, words don't mean what they usually mean when uttered by Trump. This is Lewis Car-roll. Mulvaney thinks PR will continue its re-structuring efforts. It's likely that this was just Trump bloviating and showing off and not a real threat. The president doesn't have the authority to declare default for municipal debt, anyway.

But bondholders were not in the mood to make political decision about the president's temperament. As the FT reports, "The price of general obligation bonds plummeted as much as 31 per cent on Wednesday, taking their losses since the day before Maria made landfall to nearly 50 per cent at their nadir. They rebounded somewhat as Wednesday progressed and ended down 13 per cent on the day." Congress had to pass a special law for PR to restructure its debt and the government has already taken the position that investors will get no more than 25¢ on the dollar. The FT opines that that amount may get reduced further. In practice, it's too soon to say... and it's not for Trump to say.

The problem is not that PR might default, but that Trump will talk again about the US government de-faulting. Everyone knows by now that Trump changes his mind and his rhetoric quite often, and then denies inconsistencies. Devoted voters may not care if he's erratic and a liar, but financial markets are a lot less forgiving. The default comments, invalid and irrelevant though they may be, are a stain on the credibility and reputation of the sovereign.

In the weighing room of political risk, however, Catalonia is a more immediate concern. Catalan leader Puigdemont intends to declare independence on Monday, but may get arrested before then and Spain take over the region under Constitutional Article 155. He continues to ask for EU intermediation and the EU continues to say it's an internal matter. The Guardian reports "Addressing the European parlia-ment in Strasbourg on Wednesday, Frans Timmermans, the vice-president of the European commis-sion, said the images emerging from Catalonia were saddening but it was clear that the regional govern-ment had ‘chosen to ignore the law' when organising the referendum. ‘Let me be clear: violence does not solve anything in politics. It is never the answer, never a solution. It can never be used as a weapon or instrument,' he said. ‘Europe knows this better than anywhere else ... It is a duty of any government to uphold the rule of law and this does sometimes require proportionate use of force.'"

"Timmermans said it was ‘time to talk' and backed the Spanish prime minister, Mariano Rajoy, to bring the dispute to a peaceful resolution. He said the European commission president, Jean-Claude Juncker, was in touch with Rajoy but stressed that the vote on Sunday was ‘not legal' and it was ‘an internal matter.'"

Yikes! This is the EC acknowledging that state force against Catalonia will be okay in order to uphold the rule of law. And everyone should talk but without the EC as a mediator. If not the EC, who? Bill Clinton, maybe.

We take a clue from disrespectful FT press coverage, with the headline "Catalan leader lashes out at Spanish king" and the subhead calling the separatists "far left" and the power shifting to "radicals." This is only partly the case, since the separatists come from several parties and only the most extreme of them wants Catalonia to leave NATO and the EU, for example. As for the charge of "far left," the FT doesn't name a single lefty policy, let alone an extreme one. Perhaps they exist, but name-calling without back-up facts is bad reporting.

Spanish Rajoy is making a mistake being heavy-handed—confiscating ballot boxes, firing rubber bul-lets—and likely to backfire, producing more Catalans seeking independence. Who want to belong to a country that sends tanks and soldiers against its own citizens? The more productive strategy would be talks that keep Catalonia inside Spain (and the EU) but with more autonomy. Rajoy had plenty of time to head this off at the pass, even just re-naming the referendum something else and having a multiple-choice outcome instead of yes/no. Spain should have run the referendum, pre-empting the separatists and converting the discussion from one about secession to one about various levels of autonomy, in-cluding the cost of autonomy. But tigers do not change stripes and we can't expect a good outcome.

The bigger issue is the EC, which can't find ways to deal with all sorts of problems. It dealt badly with Middle East refugees, leaving it up to Merkel. It dealt badly with Greece, and that story still isn't over. We might even say that it's dealing badly with Brexit. So far PM May is getting all the criticism, but EC officials have not been helpful, or consistent. In a nutshell, as a "government," the EC and Europe-an Parliament stink. Declining to mediate in the Spain/Catalonia crisis is another failure.

Seeing the European Commission as a failing institution is a new thing, if not to long-standing critics (such as Joseph Stiglitz). Generally, the eurozone is viewed favorably as meeting its true targets of pre-venting war between European states and promoting economic convergence. At an extreme of distress, the Greeks voted to stay in the EU and EMU. Polls showed that Italians would have voted to leave, but you can't trust polls, let alone Italian polls. Now, once again, the validity and desirability of the EU are in question on the grounds of what the hell good is it if it can't mediate squabbles? This is a lingering and sometimes resurgent euro-negative. We are going to have an interesting weekend and Monday.

On the whole, we see a favorable wind for the dollar, Trump notwithstanding.

Currency	Spot	Current Position	Signal Date	Signal Strength	Signal Rate	Gain/Loss
USD/JPY	112.61	LONG USD	09/13/17	WEAK	110.05	2.33%
GBP/USD	1.3190	SHORT GBP	10/03/17	WEAK	1.3247	0.43%
EUR/USD	1.1762	SHORT EURO	09/27/17	WEAK	1.1741	-0.18%
EUR/JPY	132.46	LONG EURO	09/13/17	STRONG	131.76	0.53%
EUR/GBP	0.8917	SHORT EURO	09/13/17	WEAK	0.9033	1.28%
USD/CHF	0.9768	LONG USD	09/25/17	WEAK	0.9732	0.37%
USD/CAD	1.2476	LONG USD	09/27/17	WEAK	1.2389	0.70%
NZD/USD	0.7155	LONG NZD	09/13/17	WEAK	0.7282	-1.74%
AUD/USD	0.7817	SHORT AUD	09/25/17	WEAK	0.7963	1.83%
AUD/JPY	88.02	LONG AUD	09/05/17	STRONG	87.30	0.82%
USD/MXN	18.2700	LONG USD	09/22/17	STRONG	17.8066	2.60%
USD/BRL	3.1347	LONG USD	09/27/17	WEAK	3.1670	-1.02%