USD on the back foot because of Trump's shortcomings and failures

Outlook:

The N. Korean missile launch occurred just after the futures markets settled, and also as we were closing the day's spot positions at our 4 pm "close." The spot market hardly ever actually closes, the one big exception being the weekend, late Friday in New York to Asia late Sunday afternoon. During the week it's very rare for an Event to take place during the Asian session and normally we expect a pullback from whatever direction Europe and New York were going. Those pullbacks are becoming less reliable by the day so far this year.

Also less reliable is the standard Tuesday pullback that usually follows a big move the previous Thursday/ Friday. Instead of getting a stronger dollar this morning, the Friday move kept going, long after the disappointment of Jackson Hole. We have to blame geopolitical tensions aroused by N. Korea— imagine, a missile sent over US ally Japan—but we have to question why N. Korean had the guts to do such a thing in the first place, and that's a one-word answer—Trump. The dollar was already on the backfoot, as the British say, and almost entirely because of Trump's shortcomings and failures.
Granted, the US-S. Korean military exercises provided the N. Koreans with a "reason" for the timing of this missile. The exercises were always seen as potentially provocative. But because they had been scheduled long in advance, cancellation was out of the question.

The US political environment is a wasteland. Trump is picking fights not only with critics inside his own party, but with those whose alliance he will need to get a legislative agenda done. Coming up hard on the inside is raising the debt ceiling, which must get done by late September to avoid a shutdown. Technically the budget expires October 1, too, and the new budget, which is supposed to contain tax reform and not just tax cuts, is nowhere in evidence. Usually the president prepares a budget and Congress, having already prepared its own, meets with the White House to thrash out a deal. This time the president has no budget plan whatever and Congress, including House Speaker Ryan who has supposedly been working on budgets for a decade, has nothing to say about his ideas or plans. The budget may be left to the devices of economic advisor Cohn and TreasSec Mnuchin. Oh, dear.

Normally we can expect a "continuation resolution" that keeps the current budget plan in motion for terms like 90 days. This time we have two Trump initiatives completely at odds with one another. The first is his insistence that the budget contain money for the Mexico Wall (for which Mexico will reimburse us). Fiscal conservatives want something else to get cut if money is allocated to the Wall. Then there's the cost of Hurricane Harvey, which will be very, very big, possibly as much as $100 billion. Trump seemed to promise that federal emergency aid is assured and without requiring an offset, but you can't have both the Wall and Harvey without breaking the budget. A couple of points: when Hurricane Sandy hit New York and New Jersey, both Texas senators voted against federal aid. At the time, now-VP Pence called for cutting Medicare and Medicaid to pay for Sandy. Yes, these guys are ideology-addled, mean, and not worthy of their titles in "public service"—but they can still throw a toolbox of monkey wrenches into the budget process.

It's little wonder the dollar is dropping like a rock, even against the pound, which has a serious problem of its own—the UK and EU talking past one another in this week's round of Brexit talks. Two things: first, we have a dearth of leadership in the US to take the reins from a failing president, either officially by getting rid of the guy or unofficially as a moral and political leader. The "natural" candidates for the job, such as McCain, are conspicuous by their absence. The US is a rudderless ship. We cannot expect a good outcome.

Secondly, let's not forget the party most affected by the N. Koreans, Japan. Tokyo is very upset. Having to send out messages to citizens to take cover, as it just did for the people in Hokkaido, is a terrible, terrible thing. Japan has no reason to suppose the Trump administration will break its promise to defend Japan, but it also has no reason to expect Trump will actually keep Japan in mind as it formulates responses. Trump cares nothing about Japan, only his own reputation (and wallet).

Will Japan take action on its own? Japan may have a pacifist article in its Constitution, but has hardly been asleep at the wheel in producing weapons and having a fully functioning "self defense" force. We can imagine Tokyo is burning up the telephone lines to Trump's generals. There would be no point in calling State—there's nobody staffing the joint. Or maybe not. The latest incident is the 18th "test" this year and N. Korea has sent missiles over Japan before, although not since 2009.

Political Tidbit: The latest juicy scandal is that Trump representatives were seeking a Trump Tower deal in Moscow to be funded by a state-owned bank and approved by Putin himself —during the campaign. Trump always said he had no investments in Russia and no plans for any such thing. Now he will have to say these representatives were working behind his bank. Some big-shot manager.

What do we expect for the coming week? The US will not take any incendiary actions against N. Korea. Something will get said, but nothing will get done. The Shock will wear off, as usual. The budget impasses will not get resolved. Congress does not return to office until next week. That mess will persist until the 11th hour and maybe past it. In financial markets, the equity gang will recover poise but with an elevated VIX and perhaps the beginnings of a serious pullback. Nerves will get frayed. And oil will likely keep rising, despite huge US stockpiles of both crude and refined products, just because scary events raise prices. The dollar will likely stabilize at current or better levels, especially after another round of good payrolls data. But FX is going to be choppy, choppy. We are going fishing.