The FX market, like everyone else, is trapped

Outlook:

We have no big releases today, with Dec trade tomorrow, possibly a fresh rise back to $48 billion from $43 billion in Nov, the lowest since 2016. Then it's on to the tiresome nonfarm payrolls on Friday, sigh.

Tonight is the Trump State of the Union speech, held on Congress premises and thus meaning he comes face-to-face with those who just impeached him. Will he resist a derogatory remark? He will almost certainly claim trade victories, partial and incomplete as they are. Bloomberg has a scathing piece on Trump's fake news version, listing six things Trump will claim that are not true or if partly true, not useful. Bloomberg also notes the extra $200 billion China is supposed to spend—more unlikely now than before the virus—might get inflated to $300 billion. Tigers and stripes.

Here's a cute example—"None of his deals could be described as ‘the biggest ever' as he has in the past. That title goes to 1994's Marrakech Agreement, which was signed by 123 countries and created the World Trade Organization." And here's the kicker: "Trump's tariffs continue to be a drag on the U.S. economy and despite what he says, American importers bear most of their cost. The non-partisan Congressional Budget Office last month said it expected the tariffs that remain in place on $370 billion in goods from China and steel and aluminum, washing machines and solar panels from round the world to lop 0.5% off U.S. economic growth this year. Businesses and economists also blame Trump's trade wars for leading to an increase in uncertainty that contributed to a contraction in private investment in three consecutive quarters last year."

Bloomberg is on the ball when it comes to currencies, too. A report late yesterday says the Commerce Department intends a new rule that will let the Treasury impose tariffs on countries with currencies it deems undervalued as a form of "illegal subsidy." To be fair, the current system of the Treasury naming "currency manipulators" doesn't work—for diplomatic reasons, China never got named. But for the US to decide what is under-valuation is a shocking abuse of power, especially since economists have never been able to do it and one of our few accurate estimates is a joke—The Economist's Big Mac survey.

The FX market, like everyone else, is trapped between over-estimating the slowdown and then pushing back against the over-estimation. If the virus is contained or cured, the ripples will become ever-smaller and eventually fade out. If it becomes a pandemic, the responses will repeat—too much fear, then a reaction against too much fear. Oddly, the official responses are all over the map. Trump declared a crisis. The RBA said "The outlook for the global economy remains reasonable." Australia's growth this year will likely be a little stronger than last year. The virus outbreak in China is just "another source of uncertainty" and it's too soon to say how long-lasting the effect will be. One is Chicken Little and the other is Nanny McPhee.

Like everyone else, we are only guessing, but we'd say the gloomsters on the virus becoming a pandemic and having the same chilling effect as SARS are right. This is not "better safe than sorry" but rather a judgment on the honesty of the scientists, who admit they lack the funding, and worldwide, not just the US, to halt outbreaks like this. So, risk-off may abate today only to come back harder tomorrow. Keep your powder dry.

US politics: The Atlantic magazine has a biting comment from the White House ebola response coordinator under Obama: Trump has "a shaky track record" when it comes to handling such crises. His tweets during the ebola outbreak in 2014 were uninformed and drove panic. "He will have to put his isolationist biases and anti-science mind-set aside, and let expertise—not his personal inclinations or the political whims of his base—guide U.S. policy. He will have to trust bureaucrats, diplomats, career staff, and agency appointees who are not on Team MAGA."

Oh, dear, what naivete. Trump adores causing panic and throwing misinformation around like confetti. Then when the real workers get the job done, he can claim credit.

In the US, the Iowa state Democratic party embarrassed itself by using an untested counting app and failing to deliver the results of the voting, which is performed by people joining one candidate group in person and if that candidate fails to get enough votes to be viable, walking across the floor to the second-choice group. Towards midnight when we gave up, it looked like Sanders and Buttigieg were the winners.

Mayor Pete lost the humility card by declaring victory prematurely. More women than men attended the caucuses and getting a candidate who can beat Trump was the top criterion for selecting a candidate. In issues, the ranking was health care, then climate. Building a Wall or restricting immigration was not among the concerns. Iowa is 92% white and delegates were 53% college-educated. Bernie did well with the college crowd but got very little from the cohort 65 and older. Notice a missing name? Biden likely did no better than fourth. Another amazing tidbit: 80% do not use social media to obtain news.

The most important thing about the Iowa caucus is not who won or technology incompetence. It was the civility, courtesy, and sense of united purpose so utterly missing in any Trump group. Nobody was overheated about imaginary grievances. Nobody was throwing insults, or punches. Civility. Tis a joy to behold.

---

This is an excerpt from “The Rockefeller Morning Briefing,” which is far larger (about 10 pages). The Briefing has been published every day for over 25 years and represents experienced analysis and insight. The report offers deep background and is not intended to guide FX trading. Rockefeller produces other reports (in spot and futures) for trading purposes.

To get a two-week trial of the full reports, including the Traders Advisories, send $3.95 to [email protected] using Paypal.