Powell’s Debut Rattles FOREX Currency Markets

Powell’s first news conference was definitely a switch from the scripted presentations given by his predecessor, Janet Yellen. Despite the difference in style, the message was clear: interest rates are on the rise, unemployment is at historic lows, and what remains to be seen are wage increases followed by an increase in productivity, otherwise, we can expect another recessionary pull back.

What does that mean for Forex traders?

Today we saw the dollar weaken against most currencies. At first it may seem counterintuitive for a currency with a rate increase to fall favor with traders, however, this anomaly is actually a repeat performance from previous USD rate rises. There are numerous academic arguments to support the pull back, however, our favorite is what we have heard from top traders at Goldman Sachs, “it’s just what happens.”.

From a more academic perspective, the 10-year T-Bills at 2.9% are teetering upon a psychological level of 3% where traders and investors believe the US stock markets may stall the longest bull market on record or even reverse it. Their argument is largely supported by the increasing default exposure from emerging countries such as Turkey, which have funded their long term projects with US Dollar denominated short term debt. As rates increase, their dollar denominated interest payments increase accordingly and become harder to pay back. The same is true with US credit card holders. In addition, as US consumer debt levels continue to surge, default levels may reach new levels at home, which could potentially stall the consumer retail engine that represents 70% of the US GDP.

With this unsettling USD backdrop, the GBP (British Sterling) is gaining unexpected strength against both the Euro and the USD. Recent developments between the two Brexit negotiators, Davis and Barnier, arrived yesterday with the usual British pomp and circumstance but in reality only delivered an extension of one year to the status quo. Some progress may have been made on some fronts, but the number of unresolved issues hasn’t changed significantly. Only the final Brexit date was moved to 2020. All of these shenanigans may be negotiating tactics of sorts, but at the end of the day, the feeling one can get from the very strained discussions between Westminster and Brussels is that eventually a referendum will be reintroduced in favor of the ‘Remains’.

Brussels’ negotiating tactics involve a high level of tolerance with little meaningful progress. They are letting this inevitable scenario play itself out. Unfortunately for Britain, when their leaders finally do choose to rejoin the EU (in whatever capacity), they will have gained less for their economy than what they had in place prior to triggering Brexit.

© 2018 Tom Kadala

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Have Trump Tariff Threats become a Bargaining Chip for Unilateral Trade Agreements?

Market reactions to Gary Cohn’s resignation as the White House chief economic advisor were swift and uncanny. One can only guess that every Goldman Sachs trader, Cohn’s former firm, were tipped off well in advance of his final decision to resign. The warning probably gave the firm’s traders enough time to prepare a severe sell off once the markets closed. Border line to insider trading, such a move might trigger an SEC investigation, but it’s unlikely. Like the NRA, Goldman Sachs ‘walks on many swamps’ in Washington, …and has for decades.

It’s not the first time that Goldman Sachs comes to Washington for a brief stay and leaves significantly wealthier. Henry Paulson was a classic example of a ‘wolf-in-sheep’s clothing’ during the financial crisis of 2009. One thing for sure, like the well trained traders that they are, Goldman Sachs alum know when to leave Washington just as they know when to exit a trade. Hence, Cohn’s resignation was just another timely departure. In December he achieved a key objective. namely, passing the Tax Reform bill. …and now that all that is done, it was time for him to leave.

Post Cohn, what next?

Intended or not, Cohn’s departure may be part of a much larger Trump/Navarro scheme.

Consider this possibility… What if the steel and aluminum tariff threats were actually a foil to coerce affected nations, which there are many, to request/beg for a unilateral trade agreement with the US? A prime example of this relatively ruthless negotiating strategy is the upcoming NAFTA renewal agreement involving both Mexico and Canada.

Surely politicians are expected to respond with counter protectionist measures and tough talk, but at the end of the day, the underlying message that will continue to resonate the most will be the implementation of a solution that will remove the tariffs completely, such as one that is conveniently wrapped into a unilateral trade agreement.

In essence, Trump/Navarro created the threat that would drive the outcomes they sought.

You may recall that early on during his first year in office, Trump bowed out of the Trans Pacific Partnership (TPP) agreement due to its multilateral structure. He accused it of being opaque and prone to unfair practices. Now with the stroke of one threat, he may very well have achieved his goal of undoing multilateral agreements altogether and replacing them with more transparent and comprehensive deals.

© 2018 Tom Kadala