Dollar policy set to dominate as Trump gets tough on trade

The U.S. continues to have a strong dollar policy unless you are talking about trade where the Administration would like to see it lower. Not for the first time, a Treasury Secretary has had to appear before the press and explain what he meant when he said a weaker dollar benefits the U.S. when it comes to the competitiveness of its exports.

It seems that saying “it benefits the U.S.” is not the same as wanting it to happen. Other Secretaries of the Treasury have had to perform this “volte face” in the past as they justify policy versus an outmoded Republican driven macho image that a strong dollar means a strong America.

The GDP data which was released on Friday was pretty much in line with expectations and continues to cast doubt on the future path of interest rates as inflation fails to rise as the FOMC expects. There is an FOMC meeting this week, but it will concentrate on the handover of the Chair from Janet Yellen to Jerome Powell. Any talk of a rate hike will be tabled until the march meeting.

The employment report will be released on Friday with a preliminary expectation for the headline to be between +100k and +250k new jobs that is about as accurate as anyone can predict. However, the growth in wages will exercise analyst’s thoughts a little more is expected to have risen a little from 2.5% in December to 2.7% in January.

Sterling preparing for resumption of Brexit talks.

Like someone returning from holiday and not knowing what to expect when the open their front door, Sterling is facing an uncertain time as Brexit talks start again in the coming days/weeks.

The first part of the negotiations will centre around the transition from being on the inside to being on the outside. It is unlikely that the transition period will be longer than two years as backbench members of the Conservative Party will see that as simply prevarication. Industry and Manufacturing would favour a longer transition as it gives them time to become more used to the new ways of doing business with the EU.

It seems that the “Norwegian” method will be used. The UK will remain part of the customs union and free movement charter but will have no power to influence any changes the EU chooses to make. It is likely that such an arrangement won’t be tolerated for more than two years in any case. Following an agreement over the transition talks will start on the future agreement and despite President Trump’s encouraging words over UK/U.S. trade an agreement particularly over financial services is vital.

Euro set to correct as momentum fades.

It has often been said that, as a trader, standing in the path of a Central Bank, is like standing in the path of an express train!

Since the financial crisis engulfed the markets and Central Banks reacted with ultra-easy monetary policy, they have taken a back seat while their “medicine works its magic”. One

Side effect of this treatment has been the almost total absence of inflation that has shocked and surprised analysts and economists the world over.

However, it seems that as the global economy starts to grow and trade becomes more competitiveness the Central Banks and in the case of the U.S. the Department of the Treasury will have more to say and do about the level of the currency.

ECB President Mario Draghi has voiced his concerns over how a stronger common currency will affect the growth prospects of the weaker Eurozone economies and we have seen first-hand just how Trump and Mnuchin intend to handle the question of the dollar’s level.

It seems that the Treasury role is far more important under a Republican than Democrat Administration. This is because Democrats tend to be more concerned about the domestic agenda and treat trade with almost benign neglect. President Trump has been vociferous (as he is about most things) in his criticism of President Obama’s record in this regard.

 

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