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Treasury Secretary Mnuchin Bombshell Sets Stage For Forex Volatility -- UPDATED

UPDATE: I have left the report below as written even after President Trump and Secretary Mnuchin said that Mnuchin’s comments had been taken out of context. I heard his comments directly when spoken several times. His initial comments were perfectly clear and needed no clarification. My best guess is that the Administration got considerable push back from senior financial market players at home and officials overseas over this new forex policy. My best guess is that we revert to the pre-existing policy of “benign neglect” of any USD weakness, with no overt encouragement of additional weakness

John M. Bland, MBA, co-founder, Global-View.com

Unexpected Statement In Davos Sees USD Sink It has been U.S. Forex policy since the time of Robert Rubin as Treasury Secretary that the standard answer of the Treasury Secretary to any question about the USD was that “A strong and stable dollar in in the best interests of the U.S.” This became a standard answer by Treasury for over two decades after an extended period of forex instability. This “policy” came to a close suddenly Wednesday when Secretary Mnuchin Speaking at the World Economic Forum in Davos, Switzerland, U.S. Treasury Secretary Steven Mnuchin offered a clear acknowledgment that the Trump administration would prefer a weaker currency, by saying “a weaker dollar is good for trade.” Mr. Mnuchin’s comments echo his previous statements and those made by President Donald President Trump has repeatedly described the dollar as “too strong” and accused China and Germany of using undervalued currencies to boost exports.

Markets initially were very skeptical about the Mnuchin comments. He was forced repeatedly to say that reports about his initial comments were consistent and quite clear. The new U.S. forex policy is based on freely floating currencies were markets determine exchange rates. stated that in the long term that the USD level should be determined by economic strength He has no interest in entering into trade wars and stressed that he has a very good and open dialogue with China and plans on a trip to China later in 2018.

ECB President Draghi Clearly Miffed By New U.S. Forex Policy In his press conference following the ECB policy announcement on Thursday President Draghi did little to hide his displeasure with the new U.S. forex policy. He stated that it was not what had been agreed to at the IMF meeting last year. Furthermore he indicated that the governing council of the ECB worried that a stronger Euro would result in an unwarranted tightening of monetary policy due to the stronger currency. This could set back efforts to achieve their policy goal of headline inflation of close to but just below 2.0% in the medium term. Also in answer to a question he lamented that there is now little chance that the ECB will be able raise rates later in 2018.

You Can get Your Fingers Burnt Playing With Fire! U.S. Administrations in the past have gotten into trouble when they have taken a simplistic view of forex markets. While a cheaper currency can indeed help exports, it also can be inflationary as it increases the price of imports and hurts consumers by raising retail prices. It also lowers the value for foreign holders of dollar-denominated financial assets such as stocks and bonds. Higher bond yields can then be necessary to hold onto those foreign investors. Higher U.S. interest rates can then feed back negatively into stock prices. This is especially an issue for a country such as the U.S. that depends heavily on foreign funds to finance a very large government debt burden. Simply put, a weak currency policy can be difficult to manage.

Amazing Trader EVENT RISK Calendar:

Mon 29 Jan 2018

13:30 US- PCE Deflator

Tue 30 Jan 2018

10:00 EZ- GDP

15:00 US- Consumer Confidence

Wed 31 Jan 2018

00:30 AU- CPI

08:55 DE- Jobless

10:00 EZ- flash HICP

13:15 US- ADP Private Jobs

15:00 US- Pending Homes Sales

15:30 US- EIA Crude

19:00 US- Fed Decision

Thu 1 Feb 2018

All Day PMIs

13:30 US- Weekly Jobless

Fri 2 Feb 2018

13:30 US- Monthly Employment

13:30 US- Trade

15:00 US- University of Michigan

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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