Drama In Washington Adds To Dollar Woes

<br /> Drama In Washington Adds To Dollar Woes – Marc to Market<br />


The US dollar has drifted lower against most of the major
currencies as the culmination of news from Washington, escalating already rising
concerns about the economic agenda that was to bolster growth with dramatic tax
reform, infrastructure initiative, and re-orienting trade. 
  The political morass that has engulfed the Trump
Administration is a major distraction at the same time that the investors had
grown more concerned about the momentum of the US economy following the recent
disappointment with retail sales, housing starts, and consumer prices. 
We have consistently argued
that interest rates are the critical driver of the US dollar. 
  The US 10-year yield reached 2.42% a week ago.
 It is now below 2.30%.  The two-year note yield, which ought to be
anchored by Fed policy, has fallen 10 bp to 1.26%.  The market appears to
be gradually reconsidering a Fed hike in June.  Bloomberg, whose
calculation for the June meeting always seemed aggressive, has eased to 90%
probability form 95% a week ago.   In contrast, the CME sees the odds as
having fallen from nearly 88% a week ago to a little more than 69% presently.
 Our own calculation concurs with the CME.  
While the news from
Washington is disturbing, we worry that talk of impeachment and the like is
grossly exaggerated. 
 Neither sharing intelligence with
Russia nor asking the FBI head to consider dropping an investigation are not
criminal even if poor politics.  Trump’s overall approval rating is low,
but there are two aspects that many might not appreciate.  First, Trump’s
approval rating, but some measures, appears slightly higher than when he was
initially elected.  Second, his approval rating among his supporters and
Republicans remains high.  In the past, when other presidents have gotten
into trouble, the withdrawal of support from their own party was critical.
Claims that American
democracy is ending are also wildly hyperbolic. 
 As Bismarck famously quipped, in a democracy one
should not see the way laws or sausages are made seems apropos.  Surely,
the republic form of government that has been evolving for more than 240 years
is more formidable and resilient than these doomsayers are claiming.  It
has survived the assassination of presidents, the resignation of Nixon and the
Watergate, and the impeachment of Clinton.  It has survived the leaking of
the Pentagon Papers and Iran-Contra.  
There were two economic
reports today that ought to not be lost in the focus on US politics.
  The first was disappointing Japanese
core machine orders in March.    The 1.4% increase contrasts with
expectations of a rise nearly twice as large.  This puts the expectation
at risk for Q1 GDP that will be released early Thursday in Tokyo.  The
median forecast in the Bloomberg survey was 0.5% for the quarter 1.7% at an
annualized pace.  The risk is slightly lower after today’s report.  Moreover,
forecasts for Q2 capex were reduced.  Also, there is risk that the GDP
deflator shows that deflationary forces are still lingering.  After
falling 0.1% in Q4 16, the GDP deflator is expected to fall to minus 0.7%,
which would be the most in four years.  
The economic data did not
weigh on the yen. 
 The more compelling yen driver is
the interest rate differential between the US and Japan.  Since the BOJ
has succeeded in keeping Japan’s 10-year yield fairly stable near zero, the key
is the US 10-year yield.  Its latest leg down has seen the dollar ease
toward JPY112.25.  Recall last week it was stalling in front of JPY114.40.
 The JPY112.00-JPY112.25 is important technically as it houses the 20-day
moving average and a retracement objective of the run-up over the past month.
 A break of this area could spur another quick yen decline toward
The second economic report
was the UK employment data. 
 On one hand, the unemployment rate
unexpectedly eased to 4.6% from 4.7%.  This is the lowest ILO measure
since 1975.  On the other hand, the claimant count rose by 19.4k and the
March increase was revised to 33.5k from 25.5k. Note that the claimant count
average 0.15k in 2016, while the three-month average now stands at 15.6k, the
highest since Q3 11.  
Excluding bonuses, average
weekly earnings growth slowed to 2.1% from 2.2%. 
 Given the recent inflation report, it means that real
wages in the UK fell in Q1 for the first time in nearly three years.
 Weakness in real wages is thought to limit consumption, which is part of
the reason why the MPC is expected to look past the near-term increase in price
pressures, which are the now still the echo of the past decline in sterling and
the vagaries of energy.  
Sterling is unperturbed.  It continues to be confined to its recent trading
range between almost $1.28 and nearly $1.30.  The intraday technicals
suggest this range will likely hold.  The euro briefly pushed through
GBP0.8600 for the first time since late March, but has reversed lower. It was
below GBP0.8400 a week ago.  A close below GBP0.8560 today would suggest a
near-term top in the cross may be in place.  
With today’s upticks, the
euro has nearly met our retracement target of $1.1130. 
 It corresponds to the 61.8% retracement of the
decline since last May when the euro reached poked through $1.16. A move
through the $1.1130 area would target $1.12 initially, but traders will likely
look for a little more than $1.13 to test the initial US election high.  

The North American session
has a light economic diary. 
 The EIA energy report is important
after the API showed an unexpected increase in US oil inventory.  The EIA
is expected to report a nearly 2.5 mln barrel draw and gasoline stocks easing
by nearly 925k barrels.   Bernanke’s speech toward the end of the London
session may draw interest.  

Drama In Washington Adds To Dollar Woes
Drama In Washington Adds To Dollar Woes

Reviewed by Marc Chandler

May 17, 2017

Rating: 5

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