Trump and Mnuchin finally agree
Donald Trump believes a strong dollar defines a strong America. Steve Mnuchin believes a strong dollar undermines U.S. trade. But, they both agree that the trick is to weaken the dollar but not tell anyone that’s really what they want. Secretary Mnuchin did his best Basil Fawlty “don’t mention the weak dollar” impersonation in Davos, but unfortunately, he “didn’t get away with it.”
The cat is out of the bag, no matter what President Trump says, more attention should be paid to ECB President Mario Draghi whose concern is over the strength of the Euro, which makes up more than 50% of the dollar index, and what effect that will have on the recovery of the weaker Eurozone nations. In fact, he is so concerned that any mention of the tapering of the Asset Purchase Scheme was put on hold for fear of pushing the common currency even higher.
The whole weak currency versus strong currency argument has, in the past, been tempered a little by the inflationary consequences of a weak currency but in the brave new, post-financial crisis world, that can has been kicked far down the road.
Brexit coming back to haunt Conservatives
Like John Carpenter releasing Halloween 15, or whatever number that particular franchise is up to now, Brexit is about to return to chill Theresa May’s spine. As if one total capitulation wasn’t enough, it is being said that another is being lined up. Not only are the UK Government about to line up the Norwegian solution, under which all the bad things about being in the EU without the ability to veto team will remain in place during the transition but that will form the basis of the trade agreement too.
All talk of a bespoke agreement will slowly fade like early morning mist to leave behind a tough EU stance Financial Services which, if the Government, capitulates over could spell the end of Mrs May’s political career.
As has been the case since negotiations began, the incredibly divisive nature of the whole Brexit issue when coupled with just how the close vote was mean that in virtually every case the Government is damned if they do and damned if they don’t.
The post stage one honeymoon is about to end for the pound with a deep correction possible but more versus the Euro than the dollar which remains shrouded in the strong versus weak dollar conundrum.
Data bringing long term direction
GDP data was released in the UK and U.S. last Friday with the Eurozone about to release theirs this week. Despite the whole short term “noise” that is droning out just about everything right now, it is macroeconomic data that defines long term trends. Jawboning can only take the currency so far but solid economic will provide the more solid backdrop.
The U.S. GDP data was reasonable and can be “excused as being the first cut” which is generally weaker than the final release. If I didn’t know better!
In the UK, the data surprised to the upside. Only marginally but it is a case of any port in a storm particularly if you are the MPC.
The Eurozone economy is starting to perform at above trend, so the risk is for a stronger than expected GDP figure which will bring mixed blessings for the ECB who are going to struggle should the Euro resume its rise. After 1.2520 the next target is 1.2780.