Notes From Underground: Please, Please Pepper Spray Davos

The U.S. dollar fiduciaries wreaked havoc on markets as Secretary Mnuchin and Commerce Secretary Wilbur Ross hit dollar bulls with a one-two punch that sent the dollar index to three-year lows. I sure hope that Mrs. Mnuchin mirrored the behavior of previous Swiss National Bank (SNB) Chairman Phillip Hildebrand, who was forced to resign in January 2012 when it was discovered his wife made a currency trade three weeks prior to an SNB policy announcement. I am sure that no White House Davos participants acted in any kleptocratic fashion (sarcasm intended). The price of a $650,000 ticket to Davos has to be of some value. Now, moving beyond sarcasm, Secretary Mnuchin broke with tradition to openly suggesting that a weaker DOLLAR is good for American trade and thus economic performance.

The Financial Times quoted Mnuchin: “A weaker dollar is good for us as it relates to trade and opportunities. Longer term, the strength of the dollar is a reflection of the strength of the U.S. economy and that it is, and will continue to be,the primary reserve currency.” Now, as potentially incendiary as this policy could be, it appears that Secretary Ross escalated the rhetoric with the following advice: “Trade wars are fought every single day…. And, unfortunately, every single day there are also various parties violating the rules and trying to take unfair advantage.So trade wars have been in place for quite a little while; THE DIFFERENCE IS THE US TROOPS ARE NOW COMING TO THE RAMPARTS“(emphasis mine). If Secretary Ross is to be believed the U.S. has now officially announced that the DOLLAR will be the main weapon to counter unilaterally declared unfair trade practices. If the ECB and BOJ are going to utilize interest policy to manipulate their currencies then the White House will jawbone the dollar lower in an effort to retaliate.

The perpetuation of ECB NEGATIVE INTEREST RATES during increased European economic activity provides a great benefit to the German economy,  which has the largest current account/trade surplus per capita in the world. Japan is also benefiting from the continued policy of QQE and yield curve control coupled with negative interest rates, which has sent Japan’s trade surplus soaring. On Wednesday, the White House gave legs to the words of previous Ford CEO, Mark Fields, who said exactly to the day, “Currency Manipulation is the MOTHER of all trade barriers.” Following the remarks, I wrote a blog post warning all DOLLAR bears to be cautious as President Trump would be receptive to the words of Mark Fields. MNUCHIN and ROSS delivered the White House’s overdue response. As Ross would say, TO THE RAMPARTS!

***The ECB meets on Thursday. There will be no change to interest rates or QE but the Draghi press conference will be important. The MNUCHIN/ROSS DOLLAR views will be a question and how Draghi responds to EURO strength will move markets. I believe the recent DOLLAR weakness will be viewed as a potential headwind  for the ECB’s inflation mandate. Why raise rates if a strong EURO keeps inflation at bay? On Wednesday the EURO closed above 1.2400 for the first time since December 2014. The 1.2400 EURO level is also important because 1.2380 was the high made on the week of July 23, 2012 when Draghi declared his intentions of “whatever it takes” to preserve the EURO and the European currency commenced a two-year rally against the DOLLAR as the U.S. was still in an aggressive QE mode and zero interest rate policies.

Be patient and see how the EURO acts as Draghi tries to jawbone the currency lower. The YEN is also in play as the Japanese will not be presented with a free pass. The U.S. dollar/trade chieftains are paving the road with incendiary devices in an effort to weaken the “mother of all trade barriers.” George Washingtons are being called to the ramparts in an effort to wage war against????

***The fallout from Mnuchin/Ross will continually be felt across a wide variety of asset classes. I will cover areas of concerns as the Davos effects are digested. But if this continues the 10-year note yields will certainly head higher as DOLLAR assets are reevaluated. This OUGHT to steepen the yield curves but it will take time for holders of U.S. sovereign debt to assess the potential damage. Today I did a FRA podcast with Peter Boockvar and Richard Bonugli. I will post the finished version as soon as it’s posted because it elaborates further on much of what we discussed here.

If the Davos effect lasts, the YEN would become an important barometer, especially relative to the EURO. Get your TECHNICALS in order as volatility in all asset classes is set to increase while the markets digest the news out of Davos. I will continue to call for the dissolution of the WEF meeting in Davos in deference to the great Adam Smith: “People of the same trade seldom meet together, even for merriment and diversion,but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices.”

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16 Responses to “Notes From Underground: Please, Please Pepper Spray Davos”

  1. David Richards (@djwrichards) Says:

    On one hand I hear talking heads pontificate that US shots in a trade war tanked the dollar with a self-inflicted wound but OTOH I hear that a trade war will help the dollar because it shrinks the US trade deficit and dollar supply to the rest of the world. Which way is it?

    Not sure it matters. For the chart to “look” better, the dollar is likely (but not necessarily) due another minor up-down move before a probable retracement of its massive loss on an intermediate timeline. Shall monitor market reaction to the ECB/Draghi per my post yesterday: Will another dovish release propel EURUSD higher yet again (rising on disappointing news rings bullish) or will we witness a behaviour change for this pair?

    • yra harris Says:

      David—good questions but the U.S. is massively dependent on free flows of capital .Any restrictions would be a negative especially as it seems that the Dollar will be the instrument of torture rather then any tariffs–Draghi I believe will talk dovish but the market reaction will of course be key—if the sentiment is truly of a Trump engineered retaliatory use of the greenback then dovish jawboning by Mario will not work.the Spanish unemployment news was a rate of 16.6%–still very problematic and makes Mario fear a rising currency

      • David Richards (@djwrichards) Says:

        Yes and the Trump admin supports free flow of capital, but restricted flow of goods & products. The exact opposite of what China and the developing countries like, haha. What could possibly go wrong. Nothing I guess so keep buying up all those soaring EM and US stocks.

  2. judd Says:

    The loosening of Vocker rule trading restrictions was bandied about yesterday @ Davos. it put a bid back into GS. One more moving part to eyeball. The steal sign is being dusted off.

    • yra harris Says:

      Judd–well stated and now with the Mnuchin,Wilbur and Donald bandying about in Davos Goldman should have a good quarter in FICC

  3. Stefan Jovanovich Says:

    I am confused. If history is an open university course, aren’t we supposed to have learned the lesson of the years since 1971 that FX is the market that no central bank/national treasury/monetary union can permanently rig?

    • yra harris Says:

      Stefan–not trying to rig but to be able to trade ahead of tweets and other pieces of headline driven genuine fake news in order to front run the reaction functions of multiple hedge funds

      • Stefan Jovanovich Says:

        My latest scholastic snark was intended to point out that the central banks/national treasuries/currency blocs have no more given up rigging their FX pricing than they have abandoned setting discount rates for their credit markets. The heresy of the Trump administration is to think that their American voters’ interests are best served by allowing foreigners to continue to manipulate the current prices for exchanging dollars. The Europeans and East Asians cannot abandon their commitments to trade and current account surplus; their economies can only sustain the permanent Keynesian borrowing and spending that supports their Bismarck-model economies if they never, ever to support external debts or exchange deficits. No dollar interest rate or “weak” dollar will ever return the U.S. to a 1960 surplus. So, the only policy choice that remains for the U.S. is to require its counter-parties to pay a cover charge -in tariffs and direct U.S. investment – for the privilege of always having bilateral surplus. But the U.S. can only sustain its own internal borrowing if it is willing to keep social spending/SOE and state capitalist lending at a level that neither the Europeans nor East Asians would tolerate.

  4. GreenAB Says:

    “Be patient and see how the EURO acts as Draghi tries to jawbone the currency lower.”

    Mario is certainly trying, but he doesn´t get it. Instead he´s causing the opposite. As i wrote months ago, when the Dollar started to weaken – the ECB has to become HAWKISH in order to slow the Euro´s rise.

    Why? Because you have a Fed that is shrinking their balance sheet, while the ECB is still increasing. So the market still has an incentive to sell treasuries and buy Euro assets.

    Yet the conundrum doesn´t stop. A higher Euro takes the pressure of Eurozone Inflation and Mario has an excuse to stay with lose monetary policy.

    I´m curious how this will play out. The Fed has to become nervours with the accelerated fall in the dollar.

    • David Richards (@djwrichards) Says:

      Someone may correct me if I’m wrong, but I believe the dollar is the sole purview of the Treasury, which has already trashed it. The Fed isn’t supposed to concern itself with the dollar level and I guess doesn’t care much while Treasury is publicly speaking of it and taking responsibility. Besides, the Fed wants lots more inflation so what better way than to massacre the dollar by 22% in one year while asset price inflation exceeds 20%. Can you say, “Banana republic”?

      • GreenAB Says:

        Inflation – that´s why I´m guessing that the Fed doesn´t like the quick Dollar drop. It´s going to put pressure on them to raise faster.

        I doubt that they want see see more inflation at this point since the economy is in danger of overheating. When they mention “inflation” then always with upside risk.

        Dudley two weeks ago: “Moreover, if the labor market were to tighten much further, there would be a greater risk that inflation could rise substantially above our objective,” which in turn could force the Fed to raise rates faster and potentially trigger a recession by doing so, he added.

        “If the economy is stronger than we think, if inflation rises more quickly, then I can certainly imagine that we’d do more than we said. So, I think it really depends on how all of these things sort of evolve. But clearly the financial conditions piece pushes on the side of going faster.”


  5. Richard H Papp Says:

    Since no one has made any comment about the new high in gold (Feb, 1370.50), I would remind folks of the history of gold after the 1980’s Plaza Accord. There was an up move into 1988 that topped out just under $500. This move penetrated the 1980 downtrend line on my point and figure (4X12) chart of the second London Fix. This got “everyone” excited. But the up move was only a $USD move that excluded the DM, Sterling and etc. gold price. So far, that is what we have seen this week the lack of significant Euro, Sterling and etc. upward price movement.
    Stay tuned!

    • David Richards (@djwrichards) Says:

      Excellent, agreed… a commodity rally isn’t a bull until it’s rising in ALL currencies.

      Per my post yesterday, the (spot) gold Euro Dxy etc all reached but couldn’t close past those stretched, key levels (for example the 618 Fibonacci @ 88.4 in dxy), and we now seem to finally see that late session change in behaviour and probable key reversals on the daily for most markets like I wrote to watch out for here – all the specs on the same side of the boat and then BANG! Let’s see whether there’s the all-important follow thru and an intermediate trend change, or else another final short-term leg first.

  6. Richard H Papp Says:

    Yes, this is an 8 year downtrend line connecting the tops of 848,720 and 512. This was the ONLY penetration of the downtrend line. That is, it was now support for the next 13 years until the bottom in 2001 of 256 second London Fix. Gee, that’s a 40 year chart I kept by hand. Must be getting old!

    • yra harris Says:

      Richard–very high level of analysis and discussion.So we need the bank of England to begin selling its Gold or some other asset.Also,when the GOLD began to rally I believe it took out a massive trend line on the Gold/Euro chart at around 320 euros to an ounce of gold and that began the rally.Today’s efforts by the dynamic trio showed that tweets are for kids—Mnuchin,Ross and trump came to davos to erase the shadow of XI and the insiders of wealth maintenance are enjoying the bread and circuses of Caesar.

  7. Chicken Says:

    “I wrote a blog post warning all DOLLAR bears to be cautious”

    Pretty sure you were warning dollar bulls, which incidentally, included me.

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