Macro Digest: Ready, Steady, Go on US Dollar - Event risk concentration in February and March

 

We stand in front of a MAJOR event risks in the Dollar direction with three major potential announcements:

 

 

February 28th,     Trump to address a joint session of Congress

 

March – 14-15^th:   FOMC meeting

 

March – 17-18th,  G-20 Finance Ministers & Central banks , Baden Baden, Germany

 

Background G-20: The G-20 Hamburg Summit Priority Agenda

 

______________________________________________________________________________________________________________________________

 

The fact Trump is struggling to keep the "business" momentum going and is falling back to being Trump "the candidate" shows the limited range and output from the Trump administration.

 

By this time in February all prior Presidents had their agenda and economic policy announced – Trump don't seem to have a direction and strategy except the "Tweeter-attack mode"

 

This means he is likely to refocus his effort leading into these major event risk – the most likely, and bigger risk, is the address to the joint session of Congress – There will high expectations for a tax plan, repealing Affordable Care Act, Obamacare, and his trade policy which could include some comments on "the unfair FX policy by China & Germany alike".

 

America first is the call to action used by not only Trump but also the majority leader Ryan when rallying behind Trump's policies. We need it means "protecting" US jobs at any cost, at least case by case, but what is the overall strategy on trade and globalization?

 

A pressured Trump is a dangerous Trump in my opinion, i.e.: we are more likely to see "fall out" under the present condition than under a more smooth administration.

 

 

 

 

The focus remain, in my opinion, on trade as Trump sees trade deficit as main culprit in his narrative of "US losing jobs" – despite having below average unemployment……

 

State Street done some excellent charts on this issue:

 

 

 

I think the chart speak for themselves, but Germany vs. US REER basis being 2 sigma cheap of course will be an issue Trump and staff will look to…. Trump Accord?

 

Not so fast says State Street:

 

 

Saxo SaxoStrats outlook remains unchanged:

 

We think Trump will pursue a policy of weaker US dollar – whether this will turn into direct policy, i.e.: announcing the end of US Reserve status similar to Trump's political hero Nixon taking US off the Gold Standard in 1971 could be more clear by end of March…. But in probability  terms this is how we see this playing out:

 

 

·         20% - Stronger dollar through no change to policy and BAT tax which is estimated to make dollar 15-25% stronger

·         60% - Indirect weaker dollar – Constant focus on other currencies being too weak, the Fed tightening (which historically means weaker dollar) & slowing US economic growth

·         20% - Direct- announcing US dollar no longer is reserve currency and forcing either New Plaza Accord or similar action by overseas exporters (1980s repeat)

 

Objective:

 

We see US dollar testing 96.00 level on unchanged policy, if confirmed that weaker Dollar is new policy of choice the Dollar cycle could be turning down in traditional 8 year cycle

 

 

This is our weekly "model" or trade indicator:

 

Source: Stockcharts.com

 

It's short & consolidating 96.00/96.70 is support of envelop & 100 SMA……

 

http://stockcharts.com/h-sc/ui?s=%24USD&p=W&yr=10&mn=0&dy=0&id=p96665010446&a=503248139

 

 

Conclusion

 

Next one month should give us major input to next direction in the US dollar, we remain bearish because:

 

·         Inflation topping: Overall the peaking base effect in energy will reduce inflationary upside  - YoY net change in oil prices comes down from +85% now in January data to 5% in May

 

·         FOMC & economy will remain slow: Yellen repeat strong rhetoric talk based on dual mandate but overall the economy continues to sputter on productivity and hence growth

 

·         Weighted risk of weaker Dollar policy is 20% going to 80% depending on definition – plus stronger Dollar will kill growth and inflation in not only US but global economy

 

 

Safe travels,

 

 

Med venlig hilsen  |  Best regards
Steen Jakobsen  |  Chief Investment Officer

 

Saxo Bank A/S  |  Philip Heymans Allé 15  |  DK-2900 Hellerup
Phone: +45 39 77 40 00  |  Direct: +45 39 77 62 23  |  Mobile: +45 51 54 50 00

 

Research: http://www.tradingfloor.com/traders/steen-jakobsen

Please visit our website at www.saxobank.com

 

 

 

 

 

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