Trump Day

The 45th President of the United States will be sworn in today, and the heavy cloud of uncertainty over
priorities and policies will begin being lifted.
 
Much of the focus in the media has been soon-to-be President Trump’s comments about the dollar being too
strong, partly because of the Chinese yuan.  Mnuchin, the Treasury
Secretary nominee, sought to clarify
Trump’s remarks, suggesting that they were not meant to be a long-term policy
endorsement.  Indeed, at the ECB’s press conference yesterday, Draghi reminded
reporters of the G20 consensus to refrain from competitive
devaluations.  

The dollar’s rise, which some trace back to mid-2014, has little to do
with the strong dollar policy.
  In fact, many have poked fun or
ridiculed the strong dollar policy in the first place, though it has not
stopped some of the same observers who now are suggesting that it is begin
abandoned. On the other hand, we have argued that the strong dollar policy was
meant to assure investors and the world that the US would not seek to devalue
the dollar to promote trade or ease its debt burden.  

Rubin articulated this stance in 1995 to differentiate his tenure from
his predecessor Bentsen who had threatened to let the dollar fall if Japan did
not change its trade policies.
  Eight years earlier, then Treasury
Secretary Baker had made a similar threat to Germany, which some observers
suggest contributed the equity market
crash in 1987.  

Also, we note that many observers
who argued that there has been a currency war for several years now are also
playing up Trump’s comments as if some threshold has been only now broken.
  We have argued that there has not
been a currency war,  The pursuit of a
monetary policy to stimulate or support domestic economic activity, we argued,
is not a currency war, even if the currency falls as a
consequence.    

There is a risk that if the US
abandons the G7 and G20 best practices of letting the markets determine
exchange rates and does actually begin to
talk the dollar down, other countries will follow, and a genuine currency war
and trade war could be ignited.
 
That said, it is far too early to draw strong conclusions about the Trump
Administration’s dollar policy, or nearly any policy for that matter. 
That said, we recognize that many of the economic team is pro-growth and favor
reducing regulation.  

Ahead of Trump’s inauguration, China and the UK have reported important
data.
  China reported its first increase in GDP in two years.  It
increased to 6.8% year-over-year from 6.7% and is the middle of the 6.5%-7.0%
official range.  Industrial production rose 6.0%, which was slightly lower
than expected and down from 6.2% in November.  Retail sales rose 10.9%, a
bit faster than expected and the strongest rise in 2016.  Fixed asset
investment slowed to 8.1% from 8.3%.  For all of 2016, the Chinese economy
reportedly expanded by 6.7%, helped by a 15.4% increase in loan
growth.  

The dollar peaked against the yuan two days after the Federal Reserve
hiked interest rates in the middle of last month. 
We argue that that
is when the market correction began, not at the turn of the calendar. 
Despite claims that China’s currency is dropping like a rock, it has actually risen for the fifth consecutive
week.   That is the longest rising streak for the yuan since early
2016.  

The UK reported dismal December retail sales.  The 1.9% headline
decline on the month is the largest decline in four years.  The Bloomberg
median forecast was for a 0.1% decline.  Adding
insult to injury
, the November series was
revised
to -0.1% from 0.2%.  The decline was broad based.  There are a few posthoc explanations, like rising prices and
that Black Friday discounts in November took sales from December, but nothing
particularly convincing.  As whole retail
sales
rose 1.2% in Q4, which regarding
next week’s first estimate of GDP is worth a one-tenth
of one percentage point. 

Sterling had seemed to be running out of steam near $1.2370, and the news
saw it fall to almost $1.2280 before finding support.
  Sterling is
poised to snap a two-week fall.  Recall it had begun the week by gapping
lower amid hard Brexit signals and
briefly dipped below $1.20.  Sell the rumor, buy the fact, coupled with
the weaker US dollar tone in general, helped sterling recovery.  However, it was unable to rise through the
$1.2430 area, where it had peaked ahead of the hard Brexit talk.  

Our constructive outlook for the US dollar is based on the divergence of monetary policy, broadly understood,
and the political risks emanating from Europe. 
Since the spring, we
have anticipated that the next US administration would compliment the less
accommodative monetary policy with fiscal stimulus
and recognized the bullish implications of the policy mix.   Our view then
puts emphasis on interest rates in absolute terms and also relative to Europe and Japan.  

US 10-year bond yields bottomed this week on Monday near 2.30% and now
are pushing above 2.50% for the first time since January 3.
  This is lending
the dollar some support.  The dollar bottomed on Wednesday a little below
JPY112.60 and is now trying to establish a foothold above JPY115.00.  The
euro peaked on Tuesday near $1.0720.  Yesterday’s push below $1.06,
seemingly on the back of Yellen’s confidence, was rejected and the euro was
squeezed back to almost $1.07 today in Asia.  However, activity remains
choppy, and the single currency is back near $1.0630 before the North American session.  

Canada reports December CPI and November retail sales.  
Headline CPI is expected to be flat, but the base effect would lift the
year-over-year rate to 1.7% from 1.2%.  Retail sales were likely lifted by
auto sales, without which there would be flat.  We suspect the risk is on
the downside after November’s outsized 1.1% rise (1.4% excluding autos). 
The US dollar is advancing against the Canadian dollar for the third
consecutive session.  The greenback is
snapped
a three-week decline against the Loonie.  The CAD1.3380
area is an important retracement target and surpassing it, could spur a move toward CAD1.3460-CAD1.3500 initially. 

Trump’s inauguration and related stories will likely dominate the weekend
press.
  Note that the French Socialists hold the first round of their
primary on Sunday.  The top two will face off on January 29.  The polls
suggest that former Socialist Macron, running as an independent, will likely
handily beat any Socialist candidate.  However, Le Pen’s base is
sufficient to ensure participation in the second round of the presidential
election in May.  The real issue is who will run against her.  Currently, the center-right Republican
candidate Fillon is the most likely, but Macron may offer a robust
challenge.  In the Socialist primary, it appears to be a contest between
three former ministers, including former Prime Minister Valls, Montebourg
(energy) and Hamon (education).  

Disclaimer

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