Notes From Underground: Trump Has Weaponized The Dollar. Do the Longs Know?

Some shots were fired last Friday, but it seems that the markets can only hear the siren song of White House tweets. There was an important story from Bloomberg reporter Saleha Mohsin titled, “Trump’s Currency War Plan Puts Treasury and Commerce at Odds.” The article noted that “a Commerce Department proposal to impose countervailing tariffs on countries that it determines have devalued their currencies has alarmed officials at the Treasury Department.”

It appears that President Trump has grown frustrated by Treasury’s failure to name any country as a “currency manipulator.” It has been Treasury’s bailiwick to monitor the foreign exchange interventions of countries who strive to artificially hold down the value of their currencies in an effort gain a competitive advantage versus any G20 country, especially the U.S. (from the Treasury Department perspective).

Switzerland, Canada, the European Union and recently Australia all invoke their currency values as an important variable in setting monetary policy, but the Treasury has failed to label any of them as manipulators and seek retribution. It was Commerce Secretary Wilbur Ross at Davos in January 2018 who said, “And, unfortunately, every single day there are 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.”

The COMMERCE DEPARTMENT has been empowered to seek tariffs in response to what it defines as currency movements meant to subsidize another nations exports to the U.S. Trump has pitted Treasury Secretary Steven Mnuchin against Ross and now that has been elevated to include judging when a currency has been manipulated to attain an “unfair” trade advantage.

It was former Ford CEO Mark Fields who said in February 2017 that “currency intervention is the mother of all trade barriers.” The judge of that barrier is now Secretary Ross. Now, if you are certain that the U.S. DOLLAR is heading higher it is time for a reassessment of that trade. As the Chinese said in a white paper last week, YOU HAVE BEEN WARNED. It didn’t take long for President Trump to involve himself in the the currency manipulation discussion as he tweeted on Tuesday that “the euro and other currencies are devalued against the dollar, putting the U.S. at a big disadvantage. The FED Interest Rate way too high, added to the ridiculous quantitative tightening! They don’t have a clue!”

Consider the DOLLAR has been WEAPONIZED. Make no mistake about it.

From a technical perspective this gets interesting as the EURO and DOLLAR INDEX are both approaching their 200-day moving averages, which can provide some impetus for long DOLLAR positions to be covered.

On Thursday morning the Swiss National Bank announces its interest rate policy decision. There will be no change but listen for the rhetoric to reflect the SNB’s concern about a strong Swiss franc, especially so versus the euro. (The EUR/CHF cross rate is a bit lower than it was at the March 21 meeting.) The Swiss have been the master of currency intervention in an effort to weaken the franc and yet they have never been the object of the U.S. Treasury’s scorn or penalties.

Watch the gold/Swiss cross in response to the SNB statement as the GOLD/currency crosses — which I have discussed in this BLOG — are all challenging multi-year highs, especially the gold/Swiss (currently 1324 Francs to an ounce of gold). The world’s central banks are being examined for their failure to meet their self-imposed targets and that is causing investors to wonder when QE policies will begin to normalize.

I have cautioned for several years that it is not INFLATION that is the impetus for a GOLD rally but investor fears about central banks losing control of monetary policy in a fiat currency world. The Trump desire to weaponize the DOLLAR has the world’s attention because how would the Draghi ECB respond to a U.S. attempt to devalue the DOLLAR?

***At Trump’s U.S./Polish press conference on Wednesday also caught my eye as the president said he’s considering sanctions to stop Nord Stream 2. As my progeny Alexandra asked me, “Who is Trump going to sanction?” That’s a very good question as he directed his criticism to Germany, which caused the EURO to drop. It Seems counterproductive to Tuesday’s tweet about euro weakness.

The Nord Stream 2 pipeline is a done deal as it brings natural gas to Germany from Russia because the energy source is needed to replace the closing of German nuclear power plants. Chancellor Merkel has inherited a position from her predecessor Gerhard Schroeder, who solidified the German/Russian energy dependency. Oh, and don’t forget that Herr Schroeder is the current Chairman of Nord Stream. Again, President Trump, whom are you going to hit with those sanctions?

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15 Responses to “Notes From Underground: Trump Has Weaponized The Dollar. Do the Longs Know?”

  1. Michael Aaron Temple Says:

    Yra
    When you carry a hammer, everything looks like a nail.

    Expect Trump to “hammer” every country for every economic slight he perceives.

    if we are now to witness a race to the bottom in ALLfiat currencies, perhaps the lodestar will rise once more.

    Got gold?

    Suddenly, CBs can’t seem to get enough of the barbarous relic.

    We shall see.

    Best

    Mike

  2. Bosko Kacarevic Says:

    Yra, shouldn’t CB buying of gold give Trump what he’s looking for — a lower USD cross rate? CB’s should not buy gold if they want their fiat currency to be lower vs USD. The EUR/USD has dropped significantly since gold hit its 2011 high, yet the USD/CAD is more than 35 points higher. Interesting to see who Trump favors in the years ahead?

  3. Trader1 Says:

    Yra,

    Ambrose Evans-Pritchard article discusses Italy issuing a parallel currency, Wouldn’t this be ‘game over’ for the EU??

    If the Italy Parallel is issued how do you think the crosses would react??

    • yraharris Says:

      Trader 1—this would make BREXIT look like a minor blip—this is what Europe fears most so look for Brussels to try to squeeze the life out of Italy to prevent this

  4. Chicken Says:

    7 year consolidation on the gold?

    • Chicken Says:

      10yr Yields:
      US 2.03
      Austria (-0.04%)
      Denmark (-0.27%)
      Finland (-0.02%)
      France (0.00%)
      Germany (-0.32%)
      Netherlands (-0.16%)
      Sweden (-0.013%)
      Switzerland (-0.536%)

      • David Richards Says:

        South Korea 1.62%
        Singapore 1.98
        Thailand 2.18
        Qatar 3.19
        China 3.26
        Chile 3.44
        Malaysia 3.71
        Vietnam 4.7
        Philippines 5.23
        Peru 5.43
        India 6.81
        Russia 7.56
        Indonesia 7.66
        Mexico 7.75
        Brazil 7.88
        Turkey 17.1

      • Michael Temple Says:

        David
        You forgot one other key yield

        Gold. 0%

        Mike

      • David Richards Says:

        Michael, indeed, I too considered adding gold to that list, haha. Don’t forget Silver-0% which looks to have even more potential, at least after the current phase of a global slowdown scare passes.

      • Michael Temple Says:

        David
        I won’t disagree with your silver analysis.

        But, Central Banks don’t buy silver, but they do buy gold. So, that is why I left silver off the list of “bonds” with a zero interest rate.

        No doubt that silver will likely outpace gold on a percentage basis from its current depths, especially if we get a rip roaring PM bull market in the coming years, which I think is nearly a certainty given
        where we are in terms of markets, politics and economics.

        As gold finally breaks through the Maginot Line of Resistance in the $1370s, there will be a lot of technical buyers, in my view. Just wait
        until FOMO ever hits the gold pits….Katy, bar the door.

        Best

        Mike

    • yraharris Says:

      To All:–as David Richards makes clear—the emerging market yields are certainly enticing

      • Michael Temple Says:

        Yra
        I think the best overall return profile belongs to the zero yield of gold!

      • yraharris Says:

        Mike –you know my views about irresponsible bankers gaining control over fiscal policy in a fiat currency world—no need to turn over the tables in the TEMPLE—thanks for your always great input

      • David Richards Says:

        Some of those yields indeed look enticing, from viable economies with good non-inflationary growth and perhaps undervalued currencies. For example, US investors might consider some exposure to Mexican fixed income, with USD/MXN near 20 and USMCA in place, which ties Mexico to US economically yet Mexico has an advantage over US in lower costs and attracting manufacturing jobs.

        Another thought is that if the big CB’s bring out their big bazookas for a currency war, they might be “better” able to drive their currencies lower than weaker emerging CB’s. The classic Big Mac index shows that many countries in that list above have undervalued currencies relative to developed market FX, and thus select EM FX might rise relative to DM FX while paying much higher yields, provided there’s no big global recession. Good for income investors. Selection is key.

        I like the precious metals and bitcoin too for the long haul, although currently it might be high in the range. But most managers don’t have the mandate to buy those, plus I shouldn’t have all my eggs in one basket in case I’m wrong as too often happens.

  5. Chicken Says:

    I was wondering what was up with Sotheby’s, sheesh.

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