Saxo Bank CIO and chief economist Steen Jakobsen sees event risks on the near horizon in terms of Trump policies and the US dollar.
Specifically, Jakobsen has a focus on a “Weak Dollar Policy” that he expects Trump to pursue.
Ready, Steady, Go by Steen Jakobsen
We stand in front of major event risks in the Dollar direction with three announcements:
- February 28th: Trump to address a joint session of Congress
- March 14-15th: FOMC meeting
- March 17-18th: G-20 finance ministers & central banks meet in Baden, Germany
As background G-20 consider 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 for the “Tweeter-attack mode”
This means he is likely to refocus his effort leading into his address to a 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. 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. We are more likely to see “fall out” under the present condition than under a more smooth administration.
The focus remains on trade as Trump sees trade deficit as the main culprit in his narrative of the “US losing jobs”, despite having below average unemployment.
State Street has some excellent charts on this issue:
Germany vs. US REER [Real Effective Exchange Rate] basis being 2 sigmas cheaper will be an issue for Trump and staff to look at.
Not so fast says State Street.
Weak Dollar Policy
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 the US off the gold standard in 1971, could be more clear by end of March.
In probability terms this is how we see this playing out:
- 20% – Stronger dollar through no change to policy and a Border Adjustment Tax 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 is no longer the reserve currency and forcing either New Plaza Accord or similar action by overseas exporters (1980s repeat).
We see US dollar index testing the 96.00 level on unchanged policy. If confirmed that weaker dollar is the new policy of choice, the dollar cycle could be turning down in a traditional 8-year cycle.
British Pound 8-Year Cycle
This is our weekly “model” trade indicator.
Bearish on the Dollar
Next one month should give us major input to next direction in the US dollar, we remain bearish because:
- Inflation is topping: Overall the peaking base effect in energy will reduce inflationary upside. The YoY net change in oil prices will come down from +85% now in January data to 5% in May.
- The 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.
- The weighted risk of weaker Dollar policy is 20% to 80% depending on the definition. A stronger dollar will kill growth and inflation not only in the US but globally.
End Steen Begin Mish
Some of my readers will not get to this point because of a perceived attack on Trump. That’s too bad because Steen presents many interesting ideas, some I agree with and some I don’t.
In regards to politics, I have lost readers recently because I recently supported Trump and because I didn’t.
I am issues based. I disagree with Trump on trade issues and on his handling of the travel ban. I generally agree with Trump on Russia.
Those looking for constant Trump bashing can easily find that elsewhere, as can those who seek constant praise for Trump.
Amusingly, One person said goodbye today, after accusing me of wavering.
I discussed a spike in the PPI and CPI twice this week. Links are below. Oil was the culprit. If oil stabilizes here, it unlikely the CPI will continue the current spike. The CPI might even decline if oil prices fall back.
That said, the medical portion of the CPI is a total joke (way understated), as is housing portion. The latter is due to the BLS’ use of Owners’ Equivalent Rent (OER) instead of actual housing prices.
But the Fed lives and breathes this stuff, and it is their view, not mine, that matters.
The market now expects at least one hike by June, and at least one more hike by December. Color me skeptical. The economic reports have not been that good. It’s been a profitable trade betting against spikes in rate hike odds.
I am bearish on the dollar as well. If the Fed does not hike as much as expected, the dollar is likely to weaken.
The dollar may weaken even if the Fed hikes.
End of US Dollar as Reserve Currency
I fail to see how halting the US dollar as reserve currency can be accomplished by decree. How? This is not the reverse of Nixon closing the gold window by decree.
Would a plaza accord work? I have strong doubts. In the first place, do countries want stronger currencies?
Japan surely doesn’t. Germany might, but do Spain and France?
That said, an announcement by Trump, even if it could not be enforced, could weaken the dollar significantly, even if it did nothing in regards to reserve currency status.
Steen did not discuss gold, but it is an important part of this cog.
If the dollar weakens, gold rates to rise (all else being equal). Might gold rise anyway?
Yes, there is a very strong chance the eurozone breaks apart. A currency crisis is on deck. The Euro, the Yen, and the Yuan all have serious issues.
If the dollar rises because of Eurozone problems, I would expect gold to do well.
- CPI Jumps Most Since February 2013 on Energy: Did Gasoline Prices Really Rise 7.8% in January?
- PPI Spikes 0.6% in January, Largest Jump in 20 Months: Start of Inflation Run? Will February Repeat?
- Farage Expects Another “Big Shock”, Warns EP on “More Europe”: Elites vs. Underdogs French Style
- Vice-Chairman of EuroThinkTank States “Euro May Already Be Lost”
- Diving Into the Medical CPI: Are Your Medical Expenses Up Only 5% from Year Ago?
The source of the 8-year British Pound cycle chart is You’ve heard of Kondratiev waves – now meet the Frisby flux, the pound’s eight-year cycle by Dominic Frisby.
Mike “Mish” Shedlock
The Seer said:
Add in the March 15 Netherlands vote too? Isn’t it the 15th?
Trump wants to be the jobs president.
More specifically, he wants to be the manufacturing jobs president as opposed to the part time coffee slinger jobs of obama.
To do so means:
Undo eight years of insanity at the EPA.
Reign in unions.
Reduce America’s highest in the industrialize world tax rate.
There is no other way to do it.
The 2 big things working against trump:
1. Aging demographics coming to roost in every country except India.
2. Debt, and lots of it.
Those 2 things take out the demand side of the equation.
Victor Adam Smith said:
Think India is going to get a lot more business from U.S. – taken away from Communist China………
Stuki Moi said:
Dorking around with little details works fine and well as talking points, but if manufacturing jobs is to increase by any other means than lowering manufacturing salaries; either total output has to rise substantially (fat chance), or manufacturing workers have to get a larger share of what is there.
Which, in practice, means the total purchasing power doled out to those not in manufactoring, must decrease. After all, those are the only ones to take from. Which means reducing earnings for lawyers, banksters, public sector unionistas, relators and the lot of them…
AND, and this is the by far most important; reduce the purchasing power transferred to all those who one way or the other are used to “earning” purchasing power by “appreciation of assets values.” From houses to stocks to bonds to who knows what.
“Asset appreciation” by way of financial pumping is, after all, the mechanism by which America’s wealth creation has been redistributed and handed out to the well connected since Nixon went full idiot and took the middle class down with him. The banksters/lawyers/realtors/”investors”/sales hacks/boiler room scamsters blah, blah that are the new robber barons, have simply piggybacked on that avalanche.
The avalanche itself, is the taking of value added by work (which is how all real value is added) by debasement and regulation, and handing it out not as compensation for that work, but instead according to who owns “assets.” Conveniently the same guys who can afford to hire lobbyists and send their kids to the same schools Senators send theirs….
That’s where the wealth created by the working and middle classes have gone. Not to China and Mexico. Compare a Mexican worker to a Wall Street bankster, or to a New York real estate owner turned President. Who of them looks like he’s gotten the most of America’s wealth?
So, making manufacturing workers, and other workers, better of for real, and not just in silly slogans at scamster revival meetings; inevitably, full stop, means ensuring they get to keep the value of what they add with their work. Instead of handing it to those who instead simply make up excuses for why government needs to “pjotect the vaijue” of stuff they idly sit on while rationalizing like women that they really, really, really did make “smart inveeestments” that the government needs to pjotect.
What if Trump’s “weak dollar policy” is just another rhetorical survey?
Just because Trump is talking the dollar down right now doesn’t mean he’ll actually implement weak dollar tactics. IOW, it’s all talk – no action – so far… and it may remain this way… all talk.
Markets could knock 20% off the dollar and the dollar would still be plenty strong enough to maintain it’s status. All things are relative, not absolute.
John Smith said:
Don’t worry, Mish. Call them like you see them. Readers already know their own opinions – why read someone else just for an echo chamber? Well stated opinions supported by evidence should always be worth reading even if one disagrees with it.
T. L. Needham said:
You cover markets and economics, and not politics, except where they become a factor on the former. Thus, I read and like your blog very much. Write-On MISH. T. L. Needham
A strong currency would be an excellent financial weapon for negotiations. As other countries debase their currencies, the wealth of the world flows into US denominated assets. Those investors and depositors surrender control of their assets to companies more aligned with US policy. You don’t have to own something to control it. Cheap oil imports powering a robotic workforce would make US products cost less. A strong dollar/cheap imports could also hide the loss of jobs due to automation as purchasing power increases..
Kathryn Bondoux said:
Maybe if Congress would pass his cabinet selections he could get more done. Shamefully they and the media plus liberal commentators are hurting Trump because its they would like to get rid of him. He is the elected president and I think he will do a good job if we let him. Kathryn Bondoux
John Magura said:
Mish, my congratulations on your evenly balanced views and good decorum in following Trump. Please don’t waiver and keep up the good work. Really liked your photographic tour of Iceland too.
Walter Banks said:
Fed up sooner than later—it’s the tea leaves now, not data
I expect dollar to stay strong relative to Euro because the economy will choke in Europe.
Adding some gold and some gold miners and dividend paying companies that are not dependent on the debt-bubble consumers because debt based consumer demand can NOT continue much longer.
If you comment using a name of “MishTalk” or Mish-anything It will immediately be deleted.
Don’t pretend to be me.
I don’t think Trump can jawbone the dollar lower on more than a temporary basis. The main reason the dollar and stock market have been so strong is money fleeing Europe and China, so political considerations will dominate.
Off topic, related to Russia allegedly looking to interfere in Montenegro.
Thanks for that Fish. Deep in study on WW1 after looking up currency reserve history after Mish comments on US ending US reserve status and investigating how UK lost its reserve status ( WW1 debt) which led me to Balkan history and the prewar politics of Serbia and increased Russian influence after the May coup of 1903 https://en.wikipedia.org/wiki/May_Coup_(Serbia) …. the politics of the time in Serbia were the pressuring of the royal house friendly with Austro-Hungary by the liberal People’s Radical Party who were French orientated ( Entente hence Russia friendly also) , and after the coup the new royal house was also Russian aligned, setting the stage for confrontation over previous differences in hegemony in the Balkans that were until then tolerable … a lot of what goes on today rhymes in some way ….
Add German influence in Croatia etc.
Has been a tinder box.
The $ isn’t in a vacuum & events could easily overtake it.
An attempred orderly wind down of the Euro?
Euro rates don’t suit Germany and depress the German x-rate and help import inflation to Germany. When inflation moves towards 2.5-3% the Germans will become very, very nervous but have no controls. ECB setting rates for weaker economies.
1) Rather than weaker southern states leave, Germany could go first to address inflation.
2) DM reinstated, x-rate vs $ less of a problem. Most EU-US trade is from Germany. DM stronger than Euro.
3) German inflation would fall.
4) Weaker Eurozone economies would have chance to compete.
5) Next strongest then leaves.
As the Euro is the 2nd largest in currency basket addressing that x-rate vs $ would be a big move not needing US action. China a different matter.
Towards the end there would be a Euro suited to weaker economies that might decide to keep in under the ECB. In 20 – 50 years Germany might come back if there has been any convergence or tax and spend harmonisation occurs.
As soon as Germany is out the $:Euro issue would diminish with a strong DM in place.
In the meantime, Merkel hinting at this is likely to weaken the Euro and exacerbate problems.
Philip. Volkoff said:
First Wolfgang Schauble and now Merkel talking about an over valued euro.
It immediately hit me, Plaza Accord. I definitely think something big is going to happen with the dollar.
My bet is the dollar is going lower against the euro. It will also help corporations to repatriate
in cheaper dollars. Maybe not a Plaza Accord but something big.
First Wolfgang Schauble and now Merkel talking about an over valued euro.
It immediately hit me, Plaza Accord. I definitely think something big is going to happen with the dollar.
Schauble talking about undervalued euro.
Is that what you meant?
Yes my apologies under valued euro!
If not dollar move then Germany moving.
This was hinted back by an influential Bundesbank man a few weeks back too.
Along the lines of renationalisation of finance.
It related to moving banks from London to Frankfurt but when I read it you could have put EURO into the same context – renationalisation to DM under Bundesbank control and away from ECB.
If I was Merkel, and wanted to put open water between myself and Schulz – I would play that card.
He is so Euro orientated and talking about “solidarity” it would open a gap immediately.
Play the “inflation if in the Euro” card and then Schulz is on the defensive.
Germans are paranoid about inflation.
It would also help reduce various tensions.
Just wondering g “what if Trump adopted Ron Paul’s plan of going back to backing the dollar with gold / silver?
What if he Trump pulled all the Troops out of the Middle East? Brought them all back and put them to work guarding the boarders, ports of entry, air ports, power facilities? Has any one , you , steen or grant Williams ever put a pencil to the $.dollar and economy.
We had gold and silver backing that got watered down over the years thanks to the existence of the Federal Reserve. We now have nothing backing the dollar except a quasi oil market petro dollar which is why we have all that crap going on in the mid east.
Eddie Ip said:
Sorry to hear that you lost readers. Readers don’t have to agree with everything you write but they should read it with an open mind. You don’t lose anything from losing readers without an open mind.
Keep up the good work!
Kind regards Eddie
You lost “readers”, but just because they can read it doesn’t mean they can think. Even my 5-yr old can read, but he cannot think rationally, or grasp complex topics, much less comprehend the three-dimensional geopolitical chess game at play. He is immature, naive, his thoughts are incoherent, and he is totally incapable of thinking for himself. Hell, this describes exactly the vast majority of Americans.
Don Langworthy said:
Motor-boat those babies!!!
The trade deficit is complicated by the fact we count $ and not the qty of goods, and interest payments to foreign investors counts in the Current Account and purchases of our debt goes into the Capital Account giving the appearance of a trade deficit.
Foreign countries may not like a strong currency, but with the boatloads of dollar-based debts they hold, they will like a strong dollar much less. Unfortunately, with the EU and euro collapsing, economic demand from Europe will shrink and with the flight to safety, the dollar will rise no matter what Trump does.
Politicians trying to manipulate trade and currencies always produces a disaster, but that will not stop them from trying. Govt cannot stop people from moving their money or hoarding, although they will try by moving to electronic money. Trump doesn’t realize foreign govts have little control over their citizens wanting to move into dollars for safety, but he will likely take it as intentional manipulation and try to retaliate.
Int’l trade has been declining for years because of the hunt for taxes by broke govts. Now that countries are sharing info on tax payers, which started in Jan, trade will get much worse.
There will be another Accord that will bring about the end of the dollar reserve status, but I think it will be another year or three.
Another Major Event March 15…
Congress and the President have to Raise the National Debt Limit that has been suspended since Oct 2015!!!!!!
A currency switch is a huge undertaking. It is not hitting the switch LOL.
Just think about changing all the codes at the retail level and even more important financial institutions. Printing a new currency seems compared to that almost easy 🙂 I doubt that there are enough programmers available (anybody fluent in ALGOL or COBOL ? Could be a huge money maker for the retired programmers) to handle that task in less than 2 to 3 years.
Pin Wheel said:
You and I agree that Trump’s Russian policy calling for detente is about the only thing keeping us in his camp. Unfortunately, he caved to the neocons with the firing of Flynn. The team he sent to Munich is one Hillary would be proud to call her own.
They spouted neocon hated of Russia from day one. Now it’s back to business as usual at the Deep State. Trump, meanwhile, is back to thumb sucking on the campaign trail showing he is really incapable of making the changes he promised.
The only good news it took only three weeks to find out what a total fraud he was when it came to dealing realistically with world affairs. The Russians got the message as well and are taking the necessary precautions. They have written Trump off as being a clown instead of a serious person who can influence world affairs. “I could take out a Russian ship.” Really? No one with a serious desire to make peace talks this way.
I remain a loyal reader of your site.
Brian Gray said:
Anyone blanketedly supporting or disagreeing with the policies of an administration is not interested in an intellectually honest discussion.
I fully understand that conservatives are sick of getting the short end of the honesty stick from the entire media and that motivates a feeling of ‘you’re either with him or against him.’ Those of us having that feeling must suppress it and look only for intellectually honest thoughts.
I am appreciative of your intellectual honesty, Mike.
If a person is not judging based on issues and principles then they are myopic.