Notes From Underground: Trump Delivers on Using the Dollar as a Policy Tool

In an interview with the Wall Street Journal, the tweeter-in-chief was reported to have said, “The DOLLAR IS GETTING TOO STRONG.” As some pundits discussed, instead of Trump calling China a currency manipulator it seems he wants to use the dollar as a cudgel to pressure others into not embarking on policies to weaken their currencies. As I wrote on April 2:

“The Trump Administration’s efforts to curb the U.S. trade deficit may see the executive branch try to depreciate the U.S. dollar if Secretary Mnuchin and Secretary Ross fail to persuade certain global actors to embark upon policies to adjust their current account and trade surpluses. The Fed’s recent tightening has not rallied the dollar–it actually closed lower on the quarter–so if the political status quo is sustained in Europe and no new political crisis emerges, the DOLLAR will become a barometer of Trump’s policies on trade.”

The Trump comments posted this afternoon sent the dollar lower and GOLD higher as it looks that we have the makings of a genuine currency “war.” Global interest rates hovering around the zero bound give central banks little room to lift currency values through the use of interest rates. Yes, there is room for the BOJ and ECB to raise rates but if they were to do that in the face of all of their previous “forward guidance” on lifting inflation to 2%,they would lose whatever credibility they have left. Therefore, Trump’s words  are ill-timed, especially as France heads into elections in 10 days. But the U.S. President has certainly fired a shot across the bow of the global financial system.

More importantly, GOLD has closed above its November 9 closing level for the first time since Trump’s victory. Gold is not higher because of geo-political affairs for those are always one-off events. (I have warned my readers not to purchase gold for an investment on news of missiles and bombs dropped.) Syrian missile strikes proved to be a one-day incident as the GOLD market followed the rally with a more severe break.

But Trump’s comments are a monetary phenomenon. The big question is: When did the WSJ interview with Trump take place and who was privileged to know the substance of the interview? A leak here, a leak there and soon people are making serious money. The front month GOLD contract closed at $1278.2 on November 9. This is a very important level because that was the day Stanley Druckenmiller was selling his gold and buying stocks. Equities have certainly rallied but GOLD has certainly performed well since the beginning of the year.

As I have previously mentioned, GOLD against other foreign currencies has performed very well. Technically, the GOLD/foreign currencies crosses provide a much stronger argument for gold. Trump has put the dollar into the policy mix. If the FED is paying attention it might use a soft dollar as a reason to want to hike rates more aggressively. Only if it was the Volcker Fed!

***April 10, Bloomberg ran an article titled, “German SPD’s Schulz Says Joint Euro-Area Debt Isn’t Topic Now.” This is a very short piece but it reveals much of what we have discussed during the past four years. Martin Schulz is projected to provide a genuine challenge to Chancellor Merkel in the upcoming German elections. Schulz is a rabid fan of the European Union and if he were to defeat Merkel many in Brussels would breathe a sigh of great relief. Schulz says that the EU does not need a EURO bond as the European Stability Mechanism “… covers the euro area’s needs.” The article notes that when Schulz was a member of the EU Parliament he advocated for euro-area debt. Herr Schulz is hiding from the German electorate by playing down an EU bond because he fears that the German citizenry is opposed to being the ultimate creditor of the entire EU financial system.

This will become an election issue as the Bavarian Burghers sound the alarm about Mario Draghi’s effort to first financially repress German savers and then to make the Bundestag the lender of last resort. Schulz has raised a very sensitive issue that will abet the AfD party more than it will help the Social Democrats. Germany is being castigated by the world for reaping the full benefits of a weak euro globally and a unified European economy domestically. ECB President Mario Draghi believes the cost of Germany’s success OUGHT to be the forbearance of the debt of its brethren, or else just issue a no limit credit card to allow the transfer of funds to Spain, Italy, France and others.

If the EURO CURRENCY rallies in response to Trump, the global financial system may become very volatile. The last thing Draghi wishes for is a strengthening euro as Italy and France are struggling to create some economic growth. In terms of the French elections, the touted trade is to be short French bonds. This is a dangerous position to carry because the ECB has massive amounts of firepower to lift French bond prices through its QE program. If Marine Le Pen does not make it to the second round runoff the French bonds will have an immediate rally. Pursue this as a trade, not a long-term position. The FRENCH bond is problematic but I am going to look to sell them on any genuine relief rally. Patience!

***I am relinking the Santelli/Harris CNBC spot from December 27. It’s very relevant for all of the discussion taking place about Europe.

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15 Responses to “Notes From Underground: Trump Delivers on Using the Dollar as a Policy Tool”

  1. Publius Says:

    The profit opportunities for so many in this administration are unfathomable. Look at the companies that put their executives *on leave* to serve the *country*. The company owned by the biggest campaign donor… front-run city possiblities here. Not to mention the delicious cake served at golf emporiums.

    Is plugging Spicer’s forthcoming history book one too many?

  2. silverbug2155 Says:

    Why can’t Dollar and Gold rise together? The rest are crap paper and soon the USD will feel the pain. So in the end Gold is the last man standing.

    • yra Says:

      Silverbug—what you discuss has happened many times but in playing the GOLD into a U.S. equity rally the GOLD/Currency crosses have provided a safer play with a nice profit.As long as the pundits continue to provide an inverse correlation btw gold and equities the GOLD/Currency has been the play—but the times they are a changing

  3. Norbert Becksrom Says:

    It’s probably my bias but I was surprised by the late rally yesterday off of Trump’s comments. First it caught a lot of people by surprise because at 2:00 markets are already starting the late session lull. The other thing is that so many people, (republicans included) struggle with Trump credibility issues. What’s he going to do? He’s made so many hollow incendiary tweets that quickly lose credibility. It helped the one long gold contract I had left so I was a beneficiary but . . .

    Norbo

  4. Rob Syp Says:

    Seems that if the 10 year futures keeps moving higher than were into the vacuum area of when rates shot higher after the election.

    https://www.barchart.com/futures/quotes/ZBM17/interactive-chart

    • yra Says:

      Rob–lots of shorts in the debt markets so the rally has caused much pain—more to follow after today’s weak CPI and retail sales data

  5. Richard H Papp Says:

    Today. Oct 13, 2017, the Dow Jones Industrials and Transportation Av. broke the lows of the secondary reaction that started in the beginning of March. These lows were 20,550.98 and 8,928.78.

    This could be “A Turn In The Tide” of the primary trend from Bull to Bear. As Students of Dow Theory know such indications neither tell us duration nor extent.

    For market students I refer you to the works of Charles E Dow, William P Hamilton, Robert Rhea, E George Schaefer and Richard Russell.

    The editorial of “A Turn In The Tide” was published in the WSJ in the AM of Oct. 25, 1929 as an editorial by William P Hamilton

    Good Luck to All

  6. Richard H Papp Says:

    A Typo- Today is April 13, 2017

  7. DM Says:

    Hello Yra,

    Do you have any thoughts on how GBP may react to the French elections/debt ceiling? We have a near-record short position by large traders and what appears to be a bottom forming.

    Could either be a catalyst for a move? I understand this is a simplistic view of that market.

    • yra Says:

      DM—I am watching the EUR/GBP crossrate and that chart says the Pound should gain against the Euro—the 200 day moving average provides a nice resistance area.The media is so biased in its reporting on Brexit that news seems to weigh against the Pound but it seems that on any news of Le Pen and Melenchon making it as the teo top vote getters I would expect the POUND to perform very positively and I would utilize the EUR/GBP resistance levels to measure my risk tolerance

  8. Arthur Says:

    How $100 of Your Taxes Are Spent
    https://www.wsj.com/articles/how-100-of-your-taxes-are-spent-8-cents-on-national-parks-and-15-on-medicare-1492175921

  9. frank c. Says:

    Re: SNB (Swiss National Bank) Currency Manipulator

    https://www.bloomberg.com/news/articles/2017-04-15/swiss-feature-on-u-s-treasury-s-list-in-possible-snb-headache

    • yra Says:

      Frank–read the entire piece and I found it ridiculous because they put six on watch but find excuses for each one—the Swiss are the main culprits and the Germans are not responsible because of the structure of the EU—but at least the piece was well written

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