We want to stick to the convention that markets prefer to ignore political stuff as much as possible

Forecast

We consider the euro to be the benchmark currency and it’s nearing support at 1.1650-1.1670. If the market decides it likes having the collywobbles over Venezuela or what comes next, it could conceivably go to the 200-day near 1.1560. All the talk of big-picture changes in the global world order are overstated and reflect fear of Trump’s recklessness and ignorance rather than any strategic plan. Trump is a seat-of-the-pants guy, not a strategic planner.

Some fair amount of the future of the dollar depends on the 10-year yield. As we so often complain, it’s not the best correlation, but it’s there. As of Friday, the 200-day moving average of the 10-year yield was 4.59%. The daily has not been above the 200-day since July 31. Can we really expect a replay? If so, the buy dollar signals we see in the euro, pound and CAD might be correct. It’s too early to say.

One reason for prices to fall and yields to rise is political, although this data is from the day before the US did a snatch-and-grab in Venezuela. Besides, it’s not clear why the US strutting its stuff on a bankrupt failed state should drive bond buyers to demand a higher premium. That’s normally inflation expectations.

Having said that, if the rise in yields persists (in the absence of inflation evidence), we would have to blame fear of Trump on the global stage. The drawback is that TreasSec Bessent is working hard to keep yields and the dollar on the low side. A big gain in yields and the dollar is the opposite of what Trump wants. So, which does he want more, the Latin American world quaking in its boots or a weak dollar to promote trade?

We want to stick to the convention that markets prefer to ignore political stuff as much as possible. A little freak-out here and there, okay. See the Mexican peso. We are not alone. Bloomberg reports“Investors responded on Monday with broad US dollar buying against other currencies. The euro fell 0.4% to $1.1672, on course for its biggest fall since October.

Still, the broader market response doesn’t resemble the typical flight to safety that follows a geopolitical shock.

“Whilehaven metals gold and silver rose, most major stock indexes climbed. The Swiss franc, another traditional haven currency, fell against both the dollar and euro. Emerging-market stocks were set for arecord high. The weekend developments are a ‘key test’ for gauging the currency’s haven status, Morgan Stanley strategists including David Adams wrote in anote.

“’We sense that investor conviction on the US dollar is low, and therefore how it responds to key events, both economic and geopolitical, has the capacity to generate a market narrative and thus sustainable price moves.”

Reuters is even more dismissive. Yes, some safe-haven dollar buying, but “Stocks edged up, bonds steadied and oil prices held firm on Monday as investors reacted calmly to potential market ramifications of the U.S. capture of Venezuelan President Nicolas Maduro.” As for the outcomes this week, more depends on the upcoming US data than on the geopolitical.

Food for thought

The US snatch-and-grab of Venezuelan president Maduro was a case of excellent US military capability. We did it before in capturing Panamanian president Noriega in 1989 under Bush I and putting him on trial in the US. We did it to bin Laden, indicted in 1998 if not captured until 2011. Using the US military to back up traditional “law enforcement” is not allowed under any law, which is why the Seal team was breaking international law by “invading” Pakistan to get bin Laden. Still, Maduro was indicted in New York in 2020 and there is precedent for Trump to have used the military to capture him. Congress can complain that it was not asked for permission as the Constitution requires, but precedent is starting to take over.

As for governance in Venezuela on the ground, Trump said the US will “run” it, with no reference to the Nobel-winner and duly elected president Machado. When the US grabbed Noriega, his duly elected successor was sworn in the same day. In Venezuela, it was the Maduro vice president Delcy Rodríguez who was sworn in. SecyState Rubio says Rodriguez seems willing to let the US run the show as a “group effort.” Trump said on TV Machado has “neither the support nor the respect within Venezuela to become its leader.” In other words, Trump wants a lackey, meaning his ego and not law or democratic elections. It’s not irrelevant that Machado is a woman. It not irrelevant that she won the Nobel he was after.

Numerous analysts say it’s the oil, stupid. Venezuela nationalized the oil companies in 1976. Later seizures of US oil company money and property resulted in numerous court cases in the US and something named the International Center for Settlement of Investment Disputes, resulting in tens of billions of dollars owed to US oil companies. Here’s where it gets complicated.

First, Venezuela is broke.  Reuters reports “Analysts estimate that Venezuela has about $60 billion of defaulted bonds outstanding. However, total external debt including PDVSA obligations, bilateral loans and arbitration awards stand at roughly $150-$170 billion, depending on how accrued interest and court judgments are counted, according to analysts. The International Monetary Fund estimates Venezuela's nominal GDP at about $82.8 billion for 2025, implying a debt-to-GDP ratio of between 180%-200%.”

Second, Trump may think he is acting on behalf of his oil company donors, but e leery. “Administration officials have told oil executives in recent weeks that if they want compensation for their rigs, pipelines and other seized property, then they must be prepared to go back into Venezuela now and invest heavily in reviving its shattered petroleum industry, two people familiar with the administration’s outreach told POLITICO on Saturday. The outlook for Venezuela’s shattered oil infrastructure is one of the major questions following the U.S. military action that captured leader Nicolás Maduro.”

Oil companies tend to be pretty savvy about capital investment, since it’s so huge in this industry. Trump has been poking them for about 10 days ahead of the grab and said on Saturday the oil companies will be spending a ton of money to restore the oilfields. The oil companies are not interested. An unnamed oil executive told Politico “But the infrastructure currently there is so dilapidated that no one at these companies can adequately assess what is needed to make it operable.” This is starting to smell like Trump’s extortion of chip companies, media, law firms, universities, and others.

On the political front, the Dems are complaining about Congress not being consulted and other issues. This is a mistake. The American voter just loves US military power, especially when it’s exercised really well, as all the retired military big-shots are saying on TV. This is a triple benefit to Trump: first, the US controls the hemisphere, a reprise of the Monroe Doctrine. Second, the mid-terms can slide back into the Republican camp. Third, it shows Iran, Russia and China that the US really does have an excellent military and Trump will use it to defend US property rights. Never mind his real goal is to enrich himself and his cronies, and not defense of the principle of property rights. We might also buy into James Carville’s idea that it’s a splendid distraction from… the Epstein files.

Heaven only knows what the Saudis and other oil producers think of Trump trying to get a competitor back on track. It will take decades, anyway.

Talk of a new world order and three spheres of influence are premature. Self-styled foreign affairs expert Rubio will be put to the test. And everyone names Greenland as next on the list. Yesterday Trump said he will “need” Greenland. But Trump knows better than the stir the European hornet nest with an outright invasion as in Venezuela, He may aim for and get rights to military exclusivity (and natural resources). Denmark said (again) Trump should stop threatening Greenland. Any chance Trump will manufacture a crisis that makes grabbing Greenland a national security necessity? You bet.