Sunday, 20 January 2019

Baron Greenback

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US Treasury Secretary tells the world and the rest of Davos that the dollar could go lower and his boss tells the same people that its going higher and higher. 

I have listened to Steve Mnuchin’s words several times, both those from his original address as well as from his CNBC panel interview and at no point does he exactly say that he favours a weaker dollar. He simply states that trade-wise America has benefited from a softer exchange rate. And? Isn’t that true? He goes on to add that there are benefits to be garnered from both currency weakness and strength. That makes a lot more sense than President Trump’s subsequent assertion that the dollar will get stronger and stronger. 

I was reminded of an event about 30 years ago in the age before Bloomberg and online interaction when the height of sophistication was a little black and green Reuters screen. A Scottish colleague of mine at the much lamented Irving Trust, long ago subsumed into Bank of New York, wrote a comment on a page on Reuters. In a set of spoof headlines he one day created the following sequence based on the then-president and chairman of the Federal Reserve System: 

”Reagan says dollar to rise”

“Volker says dollar to fall”

“Reagan says dollar to rise”

“Volker says dollar to fall”

“Reagan says ‘Who’s Volker?’” 

Not long after he’d put this up the phone rang with a Fed official demanding the disrespectful exchange be immediately removed. In an age before social media the shit could in fact still be put back in the horse and within seconds the page was scrubbed. The point I am trying to make is that the practice of talking currencies up and down is as old as the hills though it should be added markets determine where currencies trade, not governments. 

Inspector Gadget

Somewhat overshadowed by Davos, the ECB had its policy setting committee meeting yesterday followed by Mario Draghi’s press conference. How lucky was he that nobody was listening too clearly. His swipe at Mnuchin for breaking an agreement not to intentionally weaken the currency was churlish to say the least, given the way he led the rapid depreciation of the euro from just under US$1.40 to US$1.05 in 12 months between March 2014 and March 2015. 

He affirmed that eurozone interest rates will in all likelihood not rise during 2018 and maybe not until mid-2019 with the refinancing rate stuck at 0.00 and the deposit rate at -0.40%. Set against this backdrop are 17 quarters of economic growth with the Eurostat reading for Q3/2017 eurozone GDP being +2.6%. Unemployment might still be at just a smidgen under 9% but zero interest rates isn’t going to change that. If Draghi truly believes that he can bring down unemployment by letting the economy overheat, then I cannot but worry for the future of the eurozone. 

Set against 19 sovereign governments the ECB is the sole all-in-one authority at the heart of the eurozone and Draghi has made a phenomenal job of keeping the currency union alive despite the collapse of Greece and ensuing eurozone crisis but he is neither the minister of economics nor the minister of labour. Carrying ZIRP and NIRP well past their cyclically justifiable sell-by dates smacks of unabashed currency manipulation. Yesterday, it would appear, Saint Mario demeaned himself. 


There have been many efforts overnight to cool the rhetoric and to take “currency war” back out of the vocabulary. That’s fine although by this time next week all this will have been forgotten. While Davos returns to being an overpriced and overdeveloped ski resort that is easily accessible from Zurich, and hence also horribly overrun at weekends, what has been spouted there during the WEF will have been forgotten and economic fundamental will again take hold. Or will they? 

My old chum Chris Charlton of Centa Asset Management in Frankfurt sent me a rather entertaining candle chart plotting the dollar index through periods following the call by US presidents for more a protectionist trade policy stance. In 1980 when Reagan was first elected the index stood at around 85.00. A few months after his second election victory and inauguration it peaked at just under 165.00. Two and a half years later at year-end 1988 it was back down at 85.00. Whether the sharp decline was the effect of Reagan threatening to crush Japan, then the producer of electronics and cars that Joe SixPack wanted but which American manufacturers couldn’t produce is a moot point. 

Trump is not the first president to worry about the merchandise trade deficit although mostly the Theodore Roosevelt maxim of “Speak softly and carry a big stick” was followed as opposed to the newer Trump maxim of “Shout loudly and wave the big stick”. Whether the final outcome will be any different has yet to be seen. By jumping ahead of the opposition in the liberal use of social media Trump has changed the way the game is watched although we will have to wait and see whether the rules themselves have been changed by much, if at all. 

For all the screaming and stamping over dollar index weakness, it might be worth noting that the greenback, at 88.87, is a mere 2 points below its 20-year and 30-year averages, both of which coincidentally stand at 90.82. 


Meanwhile oil’s rise continues apace. As recently as June 2017 WTI floored at US$42.53 per barrel. It is now at US$65.60/bbl. As ever when trying to understand oil, the problems arise when one appreciates to what extent supply and demand dynamics follow totally different trajectories. The rising efficiency in shale gas extraction was supposed to cap the price, irrespective of how Opec controlled its output. On the other hand shale gas isn’t going away and frackers benefit just as much from managed supply and firmer prices as do others anywhere else around the world. “Drill, baby, drill” is one thing; “Pump, baby, pump” is something entirely different. 

Brent, on the other hand, is now established above US$70/bbl although chart technicians will want to see at least one more test of that level before they will feel comfortable. Overnight it printed once at US$69.97, only to bounce right back. Much of that is not oil related but was driven by a bounce in the dollar after Trump’s utterances about his desire to see it stronger. Frankly I’m not quite sure whether he knows what he’s talking about, especially in light of his having accused all and sundry of being currency manipulators. 

Alas, it’s that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. After the storms and the horrendous rainfall of the past days – surely you’ve seen the pictures of not Paris on the Seine but the Seine on Paris – I ventured out into my garden yesterday to find snowdrops and cyclamen flowering and the daffodils well on their way. Spring might not be here yet but the pointers are. Time to throw the iPad in a corner and to get out for a walk…and don’t forget to take the kids with you. Call of Duty can wait.

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