Morning Commentary: Bark But No Bite

Foreign Exchange - Morning Commentary

Bark But No Bite

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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
Equity markets remain upbeat and optimistic as the markets continue to price in a trade deal between the U.S. and China combined with the continued enthusiasm for a negotiated settlement on Brexit that allows for the least damage to both the U.K. and EZ economies. While global equities remain upbeat, G7 interest rates are once again not correlating with the optimism as interest rates are generally sideways today. Commodity prices are generally mixed and the U.S. dollar (DXY) is up for the fourth day in a row despite President Trump’s inappropriate comments about Chairman Powell and talking down the U.S. dollar.
While the press cannot help itself and continues to cover any and all comments and tweets by President Trump, markets have learned and have been conditioned to take the President comments with a grain of salt. The President, over the weekend at a CPAC (Conservative Political Action Conference), took some cheap shots at Chairman Powell as someone who liked raising interest rates and said the U.S. dollar was too strong. Not too surprising, the DXY shrugged off the initial reaction and is higher, and U.S. interest rates are nearly unchanged.
For the time being, the U.S economy continues to remain exceptional relative to its other key major trading partners. Market positioning regarding the DXY has been reduced sharply since December’s pivot by the Fed but still remains long the DXY. Continue to expect more range trading until such time that market dynamics shift and Chinese or EZ growth picks up again or U.S. growth shows evidence of slowing. At that time, we can anticipate a weaker DXY.
Reminder: There are the key ECB monetary policy meeting on Thursday and the U.S. jobs report on Friday.
History 101.
Part of the reason the euro remains weak and EZ growth is anemic is a very heavy dependence within the EZ on exports. Germany barely escaped the technical definition of a recession in Q2 and Italy is in one right now.  Italy is the EZ's third largest economy and exports make up nearly 31% of their GDP. The economy is reeling with double-digit unemployment and an increasing debt load pushed by the Populist promise to boost the economy. Italian debt is now at the highest level since the 1920s when Mussolini was in power. Italy is in a tough box; they need a sharply weaker currency which they cannot control, interest rates are near zero already and businesses will not hire or expand without proof of the economy turning the corner.  
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