Notes From Underground

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?

Tags: Angela Merkel, Commerce Department, currency manipulation, Euro, Euro/Swiss cross, Gerhard Schroeder, Germany, Nord Stream 2, SNB, Steve Mnuchin, Swiss Franc, Treasury Department, U.S. Dollar, Wilbur Ross

This entry was posted on June 12, 2019 at 7:28 pm and is filed under Currency, Germany, SNB, trade, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.