Prices: A Week In A Day

The pattern has been repeated. The Federal Reserve, to which Trump appointed the Chair, and several Governors does not move as quickly as the President wants on monetary policy. He responds by escalating the trade tension, delivering the independent central bank a fait accompli. Increasing the trade conflict succeeds where the unusual and repeated protestations of the dollar's strength fail, pushing the greenback lower in the foreign exchange market.  

Until the end of the last week, relatively narrow trading ranges characterized the major currencies. The euro did make a marginal new low following another disappointing PMI, while the German manufacturing reading remaining below the 50 boom/bust level for the eighth consecutive month. The deterioration of the US-China trade relations turned back what had looked like a pending run at the $1.10 area that held last month. The dollar was confined to less than 65 pip range against the yen for the first four sessions last week before the range was nearly doubled ahead of the weekend. 

Sterling is showing signs of life. It was the best performing major currency last week, edging out the Japanese yen. It rose for the second week against the euro after a record 14-week uninterrupted fall. The market may have seized upon a flimsy excuse--that Merkel or Macron were breaking from the EC's united front and offering a new compromise on Brexit--to take some risk off, i.e., cover some short sterling exposure. That is what speculators (non-commercials) did in the futures market in the week ending August 20, according to the latest Commitment of Traders report.

Much time and effort continue being spent on calculations of winners and losers in the US-Chinese conflict. They have focused on the means, not the end. The end is disengagement not better trade relations. The dubious legal basis of Trump's ordering US companies to look for alternatives to China, without declaring some kind of emergency notwithstanding, this seems clearly the direction he is moving. Similarly, China's retaliatory tariffs particularly on US animal protein (for which it has a shortage), and energy (oil and ethanol) that is has a nearly insatiable hunger for, are aimed not only at Trump's constituency but also to encourage Chinese companies to find alternatives to the US.  

The disengagement is disruptive. It adds to the economic headwinds hitting the long-in-the-tooth expansion in many countries, and contributes to the disinflationary pressures. Major currencies, like the dollar bloc, which are not merely commodity-currencies as often bucketed, typically do better in stronger growth phases and when risk appetites are strong. The Australian, New Zealand, and Canadian dollars were the only majors to finish lower last week, extending their losing streaks. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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