Authored by Tom Luongo via Gold, Goats, ‘n Guns blog,
Here Comes The Dollar Thanks To Italy
The whole “Death of the Dollar” thing is completely overblown nonsense. It’s as hyperbolic as the insurrection rhetoric coming from the Democrats over the “Attack on the Capitol” on January 6th.
This dollar death spiral narrative is just that, narrative. Weakness in the dollar in 2020 came from political unrest and the most epic, corrupt fight for control over the U.S. government in more than a hundred years.
That fight is over. Joe Biden will be inaugurated on Wednesday in an event worthy only of the mightiest Banana Republics. But don’t think for a second that political order hasn’t been restored for the time being in D.C.
It has. It may have been at the point of many guns and bucketloads of cheating but it happened. Be angry about it, of course. Cheating should never be rewarded, but from a market and investor perspective, uncertainty, for now, is off the table.
And markets hate uncertainty, which is why the dollar was weak after the Coronapocalypse.
So, it’s a new year, a new administration, new asset allocation strategies for fund managers and the dollar was staring at a cliff wall on the USDX, approaching but not breaching the February 2018 low of 88.15.
With each push lower on the USDX since the Coronapocalypse in March the USDX has pushed harder against resistance with each important moment (See chart, orange arrows).
Note the four periods highlighted. The first one was thoroughly bearish, with “No Hope of Reversal” in the bounce. After that there was a “Failed Reversal,” followed by a quickly reversed reversal (“Back-to-Back Reversals”) which culminates in this week’s strong “Two-Bar Reversal”).
In my read here, the “Failed Reversal” in September is what set up the last leg of the dollar bear market. Had the USDX completed the two-bar reversal there we would almost certainly be looking at a different scenario today.
But sometimes markets have to get way offside, overly unbalanced in one direction in order to finally put in a definitive bottom or top. The “Back-to-Back Reversals” in October were the catalyst for the further breakdown of the USDX.
That set up the strong move this week into the close on Friday which should be disturbing for a dollar bear.
That this happened against the backdrop of Biden’s unveiling his stimulus and tax plans for his administration tells me that risks are shifting away from the U.S. and back towards other areas of the world.
And other areas of the markets. Stocks sold off into the close, gold was monkey-hammered again, but held (barely) medium-term support at $1819 (cash basis) and bitcoin had the kind of volatile week associated with rallies running out of steam.
The euro put in a very weak close this week, which is why the USDX jumped the way it did. And the question is why?
It’s not a hard question to answer if you’re looking at the big picture. Political unrest in the U.S. is ending while it is rising again in Europe, post-Brexit amidst draconian lockdowns over the new Super COVID 2: Viral Boogaloo.
The Dutch government under Prime Minister Mark Rutte resigned on Thursday thanks to a scandal involving abusing lower-income families child subsidies.
Rutte is a Davos Man through and through and this resignation may be some typical deck chair shuffling ahead of March elections there, since he’s done his job to sell the Dutch out to fund euro-zone fiscal integration and tempt the country to go harder left after the ‘conservatives’ abused poor people clawing back gov’t handouts.
The current polling certainly suggests nothing untoward happening in March. But, things change and this election will be important to watch.
More significantly is what is happening in Italy as Former Prime Minister Matteo Renzi took his ministers and left the coalition there. Renzi first bolted from PD, the Democrats, and formed a new party (with all of about 3% support) taking a couple of cabinet ministers with him.
Then they pulled out of the coalition sending Italy towards its 131st government in 160 years. Gods, I do love Italian politics… from an entertainment perspective, of course.
This, I think, is a power play by Renzi to change the makeup of the government without calling for an election, in effect restoring him to power as effective Prime Minister since the fragile coalition there needs his votes and polling is against all the parties in power.
Renzi becomes the tail wagging the dog in the corrupt romp and stomp of Italian politics.
It’s the kind of in-fighting and back-stabbing that is the hallmark of Italian Politics. And it doesn’t bode well for the government surviving until elections in 2022.
The goal will be to further marginalize Five Star Movement (M5S), reducing their influence within a government they are supposed to be the dominant member of.
Five Star made the enormous mistake of throwing in with PD in September 2019, ousting Matteo Salvini’s Lega from the government and they will now pay the ultimate political price, extinction, as fake populists. I laid all this out at the time.
The coalition has been stymied by both Conte and M5S and M5S’s poll numbers reflect their mission creep.
When that fails, Di Maio will have to make a deal with PD or face elections which will see M5S out of power.
And if he makes that deal, which Brussels and Rome want him to bite on, it will be the beginning of the end of M5S...
Salvini is still in the driver’s seat because a betrayal by M5S of that nature will see Italy ground into a paste. Look no farther than the English Channel to see what Brussels wants to to do the Brits over Brexit. IF you think Italy will be spared after their dalliance with insurrection you are terminally naive.
And Salvini not being a part of that works to his advantage going forward. Sometimes the best way to win a battle is to retreat and let your enemies over-extend themselves.
Di Maio wasn’t a strong enough leader to keep the disparate factions within M5S on mission. He will now pay the price for his lack of vision.
Expect polls in Italy to shift even further right while this goes on. Renzi, another Davos Man through and through, wouldn’t have made this move if he wasn’t confident the pro-Brussels status quo in Rome would be maintained.
But it has, for now, thrown a cloud over the euro, causing the dollar to bounce. Because there is no easy path in handicapping Italian politics, not when the entrepreneur class there in the form of 50,000 restauranteurs are openly defying lockdown orders in protest and save their businesses.
Politicians in Italy have become so enamored of their own chess moves they’ve done the one thing you should never do…. get between Italians and their food.
Let’s call this the Antipasto Rebellion.
Italy, Index poll:
PD-S&D: 19% (-2)
FdI-ECR: 17% (+1)
FI-EPP: 7% (+1)
A-S&D: 4% (+1)
IV-RE: 4% (+1)
+E-RE: 3% (+1)
+/- vs. 2 Nov. ’20
Fieldwork: 13 January 2021
Sample size: 800
➤ https://t.co/yZmKw0FzEV pic.twitter.com/zMqERR0kyl
— Europe Elects (@EuropeElects) January 15, 2021
Current polling in Italy has Salvini, currently being given the Soros treatment by the Italian courts, returning to power without the need for the feckless M5S. Lega along with the Brothers of Italy (FdL) and possibly Forza Italia (FI) should take a majority in any election and oust the current ruling class.
Moreover, the Brothers of Italy will hold Salvini to his more extreme positions, like leaving the euro, mini-BOTs if not Italexit itself. So, this is an existential threat the establishment in Rome is facing and it’s why Renzi’s challenge is both brilliant political maneuvering and likely to succeed.
But, if M5S grows a spine and pulls out of the coalition then we are headed for early elections in Italy. And that is decidedly euro-negative. For now, we have a bounce in the dollar but euro headwinds are gathering and shouldn’t be ignored.
Biden will be pushed to trash the dollar as much as possible. His $1.9 trillion COVID relief proposal won’t meet with much opposition, but if the Democrats are serious in pursuing an impeachment of Trump then, at a minimum, that will delay any action by the Senate which gets immediately bogged down in a strategically-moronic impeachment trial to satisfy Nancy Pelosi’s bloodlust.
That they fear Trump enough to do this tells you how scared they really are and that is long-term dollar negative. But, for now, I would listen to former Prime Minister and President of Russia Dmitri Medvedev who doesn’t believe the dollar’s demise is on the near horizon either.
But the long-term stability of the US dollar will be largely determined by the resilience of institutions for the protection of property rights, the demand for American goods and services in the global market, as well as the predictability and independence of the Federal Reserve System (FRS), which underpins the confidence in the US dollar. US dollar volatility will abruptly increase only if US manufacturers lose a considerable share of the world market or investors doubt the existing safeguards for the protection of assets, the relevance and soundness of the FRS’s long-term policy. Since this is impossible in the near future, it seems of much more interest to us what Joe Biden’s economic policy will look like.
Strategically, bet against the dollar over the decade. In the immediate-term, it is oversold along with the idea that America is no longer the center of the world’s economic system.
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