This week brought the much-anticipated inauguration and follow-up comments from Trump and his team. As discussed in last Friday’s post, I was expecting the tariff rhetoric to be less punchy than anticipated. This ultimately came through so far. In his WEF speech and Q&A, he shied away from discussing concrete trade threats. Instead, he welcomed countries to come to manufacture their goods in the US or get punished with trade policies. What would you do if you were heading a country? Of course, you give all indications of moving some of your production to the US, and this takes time, which is the main game here. I'm not sure Trump is that naive.
Regardless, The US is gearing up for a major shake-up in trade policy, with comprehensive investigations into trade practices expected to conclude by April. The focus is on addressing trade imbalances, unfair practices, and issues like currency manipulation. Key areas of investigation include trade deficits, anti-dumping violations, counterfeit goods, and the impact of duty-free exemptions. With China, the emphasis will be on compliance with trade agreements and intellectual property protections, while economic security measures like the effectiveness of steel and aluminium tariffs and the impact of foreign subsidies on federal procurement are also under review. Recommendations may include new tariffs, renegotiated agreements, and establishing an External Revenue Service to manage trade revenues, as Trump had previously eluded to.
Trump retains the option to invoke the International Emergency Economic Powers Act (IEEPA) to implement tariffs immediately by declaring a national emergency, bypassing the need for congressional approval. While Congress can challenge this move, historical precedent, such as Nixon’s 1971 emergency tariffs, suggests it’s legally feasible. Trump has already signalled potential 25% tariffs on imports from Mexico and Canada, which together make up nearly one-third of U.S. imports, including key categories like agriculture, automobiles, and industrial products. These tariffs could significantly disrupt supply chains, increase costs for consumers, and exacerbate inflation.
What does that mean for markets? For now, the US Dollar is possibly going to be trading weaker. EM FX and Equity markets are rebounding from subdued levels. A weaker or stable Dollar is a blessing for global markets and asset markets. It’s noticeable that European stocks are up almost 8% in 3 weeks this year so far. That’s a hell of a return in such a short time span.
The question here is whether we are entering a higher EUR/USD opportunity. The blue line highlights the Eurostoxx/SPX ratio, which has rallied ever since the election, while the EUR (purple line) has further depreciated. The key here is whether the rally will turn into something bigger, which would possibly bring a higher EUR with it when looking at the most recent analogue.
Zooming out reveals a varying regime. Pre-GFC, around the end of the 90s, US stocks tanked relative to European counterparts (yes, technology drove much of this underperformance). This was also driving the US Dollar higher due to its risk-off nature. Ever since the GFC and sovereign crisis, however, the relentless train of US outperformance has taken hold. The relatively small blip (yellow area) is hardly noticeable.
Why would something be different now? If indeed we are on the cusp of the US dominance ending due to, say, the US technology sector rolling over similar to the late 90s, then we can infer that this would likely come with a higher USD. Given all the structural, political and economic problems, would you rather invest in a European or US company? The answer for me is clear. As such, I don’t believe we are on the verge of a lasting outperformance of European stocks, and I don’t see signs of why the EUR/USD should be much stronger either at the same time.
The BoJ hiked, as widely expected, by 25 bps. Ueda said that he doesn’t believe that they are behind the curve. I respectfully disagree. At this rate, they would be back to neutral, well, never. Taking zero real rates as broadly neutral. Currently, using the 2-year real yield, we are at -3%, using headline CPI.
The Yen liked the announcement and the somewhat more hawkish tone at first glance positively. We then started selling off, despite the US Dollar broadly weakening throughout Friday.
Now, pretty much every time when the BoJ finally hikes, things seem to fall apart. The Yen carry unwind hit risk assets last summer. What is it going to be this time around? We shall find out.
This is a reminder that you can now also use my models in TradingView scripts, which I made available for subscribers to use on their charts. This is not for free and incurs an additional cost. I am also in the process of making one of my intra-day models available. This will come at no additional cost to existing users, but new admissions will see a price increase.
Here is a little preview. These are 15 min bars for the ES (mini-SPX future). This is still in refinement mode but the results so far are encouraging. I’m trying to incorporate volume into the mix as well, which should be interesting.
If you are interested, ping me an email with your TV username. Note that only paying subscribers will be granted access. No exceptions.
Macro D kindly put together an FX Options primer, which you can find below. It’s completely free, following our core principle that education should be free. That will never change.
Let’s now read what my friend Macro D has in store for us. We then scan the multitude of charts I have updated below.
Let’s explore!
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