Wednesday 17th May 2015
Is that it, then ? For the Dollar, is the Trump effect is officially over .....?
ref :- "Best Forecasters See No Reprieve for Dollar as Trump Woes Mount" , Bloomberg Markets
Obviously we planned our time away to coincide with some of the quietest conditions of recent times ..... strong mind you, especially in stock markets, but calm. The VIX, which maps the volatility of S&P 500 options and is regarded as a wider measure of market volatility generally, settled at 9.77 on May 8th. That's the lowest level since 1993, no less.
Of course the thumping but entirely predictable win for Emmanuel Macron in the French Presidential election has had a good deal to do with it, shutting the door on the possibility of success for a populist, anti-euro party within the EU for the time-being. ***
But mainly courtesy of President Trump , it's not as though there haven't been plenty of other political misadventures to worry about. What's remarkable is how the markets been able to absorb them without any discernible discomfort for so long.The signs are though that there's a limit to what the administration can be expected to achieve if it's continually having to defend itself against some pretty damning accusations. Plainly, there's a sizeable market element that has lost faith in the President being able to gather the support he needs to push through his economic agenda whilst fighting an avalanche of claims of decidedly unpresidential behaviour.
Not to put too fine a point on it, and assuming that it hasn't all been "fake news", President Trump has been lurching from one colossal faux-pas to the next like a stag-night comic at a convention of nuns. We don't know whether the latest claim -- that he asked the former Director of the FBI James Comey (before he sacked him) to drop an investigation into ex- National Security Adviser Micheal Flynn and his dealings with Russia -- is true or not. Presumably, if it is then the President would be open to accusations of obstructing the course of justice. That seems like a big leap from here and the claim may prove to be false -- though the most likely outcome is for it to remain unproven. Nevertheless for some, particularly for many US Dollar longs who had previously got themselves all fired up by the Trumpflation story, it looks like the straw that broke the camel's back.
Back on Nov 9th 2016, the day after the US election, after making a low of 95.88 the Dollar Index stormed to a close of 98.61 as traders re-appraised the boost that Mr Trump's stated economic plans would give to inflation, growth and interest rates. On Jan 3rd this year, the $ Index made a high of 103.82. This morning it's trading at 98.07 ..... that's right, it's given up all of it's Trumpian gains.
One could argue that it's not all down to Mr Trump, and it's certainly true that some tepid economic data has not helped the dollar recently. The US economy has a long history of disappointing in the first quarter, but even so some unimpressive numbers for retail sales, inflation and housing starts would not have been what the administration was hoping for. Some have even questioned whether the Fed will be able to carry out two further rate hikes this year as they have indicated. Expectations of a rate hike at next month's Fed meeting have fallen from near universal to around 74%, which hasn't helped the US unit. But given the US's Q1 record it's far too early to conclude that we are already witnessing the first signs of an unexpected slow-down, and two rate hikes remains the heavily backed favourite.
No ..... the main factor undermining the Dollar is the perception that the president's political travails will greatly diminish his chances of making good his promises on tax-cutting, infrastructure and growth. Mr Trump sounded positively triumphant the other day (he's not a man to avoid hyperbole) when he managed to get his watered-down Health Care Act through the House of Representatives, but the fact is that this is only the first stage of what promises to be a tortuous journey to get even this version of the legislation enacted into law. When it comes to the issues that the markets are concentrating on -- taxes and spending -- he's going to have a real struggle and will need every vote he can find to get his measures through.
Which is a problem that COULD prove insurmountable. We can take for granted Democratic opposition to things like tax cuts for the very wealthy, but it's rebel members of his own party that Mr Trump should be most concerned about. Conservative Republicans are naturally (and vehemently) opposed to ballooning budget deficits -- which is exactly what they're likely to get if taxes are cut and government spending goes through the roof.
The government's argument is that swelling the deficit would be a short-term thing -- the tax-take from an expanded economy would soon more than make up for reduced levels of tax. This of course is the Laffer Curve theory, which attractive as it is to many is not supported by historical evidence. If the President is to get Congressmen and Senators on his side when they might be naturally inclined to vote otherwise, he'll have to get them to take him on trust.
The trouble is, the best way for a President to get people to put their trust in him is to act "presidentially", not to blunder around like a tin-pot dictator (or so his detractors would allege). We'll just say that it's not surprising if confidence in Mr Trump's ability to deliver on his manifesto has waned, and the fortunes of the Dollar with it.
Long US Dollar was the "most crowded trade on the planet", according to Bloomberg, but now some good judges see further falls in the pipeline. The Euro, boosted by a freshly-rosy political picture and some healthy economic data is the most obvious beneficiary. Mr Trump's shenanigans have also finally reawakened the Jap Yen, always the first port of call for currency traders seeking a safe-haven in a "Risk Off" environment.
The argument for further Dollar weakness is reasonable, but once again we have to keep everything in context. What if the US data follows the path of recent years and posts strong numbers after a weak first quarter ? That would get people talking once again about the interest rate differentials that would favour the Dollar regardless of the progress being made on the administration's economic agenda (or lack of it). A stronger dollar in the medium-term (say, by year-end) is still on balance the more popular call, after all.
Of course, for that to happen the President will probably have to keep out of trouble .... and just at the moment, that appears like a very big ask indeed.
*** NOTE : We'll assume for a moment that French parliamentary elections won't leave the new President powerless, and that Angela Merkel will cruise through for a fourth term in Germany (at the very least, votes for the right-wing, populist AfD party seem to be disappearing down the plug-hole). Most interesting is the surprise election called in Austria, probably on Oct 15th. It would go against recent trends, but the anti-euro populists there have a genuine shout. A nasty surprise for Brussels is possible after all, if not exactly probable.