The US dollar was hammered last week, and there is little from a technical or fundamental perspective to suggest near-term movement in the direction of our longer-term forecasts. The escalation of the investigation into Russia’s involvement in the recent US election threatens to take resources, time, and attention away from the economic agenda, which had already begun meeting some skepticism. At the same time that expectations are mounting for a shift in ECB’s stance in a few weeks, and Japan’s economy surprised on the upside in Q1.
The Trump Administration’s inexperience in the legislative process will be again evident next week after the CBO provides its estimates on the House health care reform. Some legislators admitted to not reading the entire bill before voting on it, but this may not be as unusual at is sounds. More telling was that the chamber voted on the measure without learning the CBO scoring (on the deficit). When it is provided, another vote may be necessary to prepare the groundwork for the eventual reconciliation process, which means Democrats support may be unnecessary.
Meanwhile, investors and policy makers are growing increasingly confident that Europe has turned the corner. Draghi himself confirmed last week that the crisis was over and the recovery was broadening and becoming more resilient. Interestingly, the signal is not being sent by leaks or comments from the creditor countries as it was previously. There is widespread expectations that this will be expressed by the ECB at next month’s meeting.
A decision to taper and extend the asset purchases into next year is expected later this year, and possibly at the September meeting (with staff forecast updates), which takes place prior to the German election. And that is the other point. Political risk in Europe has diminished at the same time US political risk has increased. The populist-nationalist threat has diminished in Europe, and it appears that Merkel will succeed in her quest to be reelected Chancellor for a fourth time. Austria’s election has been set for mid-October, but it is prominent on investor’s radar screens. We, like other, are concerned about Italy’s election, but that is a 2018 story.
