USD on trouble, but temporary beneficiary of European worries

Outlook:

We get the US Markit flash PMI and existing home sales today, not top-drawer in the data department. More exciting is Canada reporting March CPI, probably a dip back to 1.8% from 2% in Feb but an unchanged core at 1.3%.

The currency to watch from now until Monday morning is the euro. Campaigning was suspended in France because of a public shooting and would end anyway at midnight tonight, according to Bloomberg, which also reports Macron and Le Pen lead, as expected, but with Commie Melenchon and oldtimey Republican Fillon trailing, if closing the gap.

If the wrong set of French presidential candidates wins the Sunday round, we need to expect the euro to tumble through support. As noted above, we can already see some limited paring back of long euro positions but not enough to set your hair on fire. It is likely to develop further today and then we have to ask whether short-covering on a Macron/LePen win will not deliver a spike late Sunday or Monday. The latest polls show these two the likely winners for the May 7 second round run-off.

But hardly anyone saw Brexit or Trump coming so complacency is not really called for. And yet yields are flat and gold is falling. The CAC equity index is higher and the French-German yield spread has moderated from 80 bp back to 62.6 bp this morning. VIX is on the low side of the range.

The dollar may be the temporary beneficiary of European worries, but it is beset by the enduring effect of bad data and the stink of a failed presidency. In the now customary effort to distract attention from real issues crying out for a coherent plan, Trump is again promising a health care bill, perhaps as early as next week. Nobody believes he has a plan. This is to distract attention from the unhappy fact that Congress needs to pass a budget continuation in the next week or we get another government shut-down on Friday. The budget director is a Trump ideologue who wants to include funding the Mexican wall, among other things, that will never pass.

Next Friday is the 100th day of the presidency, an arbitrary benchmark that nonetheless carries weight in the form of a judgment on whether the president can get things done. This one can't. The Muslim travel ban is mired in the court system. This week the gung-ho Immigration agency deported a kid with protected status under the Dream order and that has gone to the court, too (and with delicious irony, the same judge Trump dissed during the campaign who made him cough up millions over the Trump Uni-versity fraud). Trump also decried Canadian dairy in a trade rant stuffed full of non-facts. The WSJ has a story on how "Buy American" is unrealistic.

Trump charged Iran will not hewing to "the spirit" of the nuclear freeze, despite the inspectors affirm-ing Iran is in compliance (as it does every 90 days). He says it's one of the worst deals ever. Nobody believes he has read the deal or understands the history and context, so this is another lie. And it comes as a deliberate attempt to distract from the absence of a strategy in North Korea.

And the financial markets are not blind to Trump's failures. He sent TreasSec Mnuchin out to say tax reform can be passed by the end of the year, another effort to distract attention from policy issues that are genuinely urgent, like the budget. But it didn't work this time. The 10-year yield this morning is almost unchanged from the close yesterday and the close the day before.

Here's the forecast: gloom over the demise of the Trump reflation trade gets a grip. Yields continue to drop. Market News notes that the fixed income consensus is shifting toward stimulus not arriving until later this year, despite Mnuchin saying tax reform is "pretty close." The low yield on Tuesday was 2.166%, which was the lowest since Nov 14. Traders are eying old lows from Nov 17 at 2.187% and Nov 15 at 2.184%. "Yields sliced through these old lows earlier this week" and can get back there in a minute.

The post-election surge is a dead duck. We saw highs at 2.639% on Dec. 15, 2016, which was the high-est since the Sept. 19, 2014 peak near 2.655%. To be fair, it was the Fed outlook as much or more than Trump reflation driving this move, but if the move is dead, we say it's Trump that killed it. "For bond bears to feel more confident in their view, 10-year U.S. yields must vault 2.43%. The 100-day moving average comes in at 2.428% and is near the 55-day moving average, currently at 2.412%."

Analysts see a recovery in yields during the second half of the year, but in the meanwhile, the dollar is losing its key support.

In Europe, the polls will be right and Macron and LePen will win the top two spots for the May 7 run-off. Macron will win, not least because LePen is female and a racist. There is a chance the two winners will be Fillon and LePen, in which case Fillon wins. Either way, the euro comes roaring back from a short-lived slump and soars back to the March high of 1.0905 on a relief rally. When in doubt, sell dollars.

Currency Spot Current Position Signal Date Signal Strength Signal Rate Gain/Loss
USD/JPY 109.17 SHORT USD 03/21/17 STRONG 112.51 2.97%
GBP/USD 1.2786 LONG GBP 04/12/17 STRONG 1.2495 2.33%
EUR/USD 1.0694 LONG EURO 04/13/17  STRONG 1.0643 0.48%
EUR/JPY 116.75 SHORT EURO 03/28/17 STRONG 120.19 2.86%
EUR/GBP 0.8363 SHORT EURO 04/12/17 STRONG 0.8487 1.46%
USD/CHF 0.9988 SHORT USD 04/13/17 STRONG 1.0043 0.55%
USD/CAD 1.3475 SHORT USD 04/13/17 WEAK 1.3244 -1.74%
NZD/USD 0.7004 SHORT NZD 04/12/17 WEAK 0.7022 0.26%
AUD/USD 0.7522 SHORT AUD 03/28/17 WEAK 0.7607 1.12%
AUD/JPY 82.12 SHORT AUD 03/22/17 STRONG 85.20 3.62%
USD/MXN 18.8562 SHORT USD 01/31/17 STRONG 20.8108 9.39%

This morning FX briefing is an information service, not a trading system. All trade recommendations are included in the afternoon report.