01/28/2017 - The Roundtable Insight – Yra Harris Emphasizes Keeping An Eye On Europe

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FRA is joined by Yra Harris to discuss Trump’s effect on the global market, along with Draghi’s influence coming from Europe.

Yra Harris is a recognized Trader with over 32 years of experience in all areas of commodity trading, with broad expertise in cash currency markets. He has a proven track record of successful trading through combination of technical work and fundamental analysis of global trends; historically based analysis on global hot money flows. He is recognized by peers as an authority on foreign currency. In addition to this he has Specific measurable achievements as a member of the Board of the Chicago Mercantile Exchange (CME). Yra Harris is a Registered Commodity Trading Advisor, Registered Floor Broker and a Registered Pool Operator. He is a regular guest analysis on Currency & Global Interest Markets on Bloomberg and CNBC. He has been interviewed for various articles in Der Spiegel, Japanese television and print media, and is a frequent commentator on Canadian Financial Network, ROB TV.

 

TRUMP’S EFFECT ON THE MARKETS

This is going to be a slow, grinding process. There’s a lot of things to dislike about Trump, but he’s showing some real leadership in that he’s willing to go out of a lot of boxes. He wants to renegotiate NAFTA so relations with Mexico and Canada would be stronger after it takes place. The Mexican Peso, by all fundamentals, is one of the most undervalued assets in the world. The currency has depreciated 700% since the beginning of NAFTA.

When you look at the value of the Peso, outside of an absolutely closing of the border, you’ll shut down America. The same goes for Canada. The Mexicans have tried to hold their currency, they don’t like the weakness of their currency, but the world has done it. Anyone who has emerging market exposure goes to sell the Peso because it’s the most liquid, but that’s driven it down to 21.28 Pesos to the Dollar. For a currency to devalue that much, it has to be choking on debt or going through phenomenal inflation.

With Canada being a member of NAFTA as well, there’s a strong dependence of Canada on the US economy. The Canadian dollar, weak as it is compared to eight years ago, is still medium.

Trump’s a negotiator, so if went in and spoke to the automobile manufacturers and said “This is what I want from you, what do you want from me?”, they must’ve replied by saying that the Japanese Yen is incredibly weak. It was a cry saying they want relief from this. There’s a lot of short position on the Japanese Yen out there. To couple with that, the Australians approached the Japanese saying they should carry on with PPP regardless, and the Japanese disagreed.

There can’t be a positive course because the world is at odds. United States will move unilaterally to depreciate the Dollar. Trump operates on a give-get basis, and doesn’t hold to international deals like avoiding currency intervention. A lot of Japan’s monetary policy that resulted in financial repression was done to drive currency values lower.

 

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TRADE ARRANGEMENTS

Mexico has a debt on imports, which is basically a surcharge. The US is the opposite because we tax exports for revenue and allow imports. Global supply chains are so deep now. A lot of fields are changing. Trump does want to do a reset on the global order. The entire global order has been a burden on the American middle class especially. It was good for them in the 50s and 60s when the US dominated the world stage, but that was when the US had no competition. It’s harder now because there’s more global competition, but the US is still funding that. And that’s what Trump is saying.

Draghi told the German people that they’ve gotten a lot of benefits from being in the EU, and that may be true but they’re running into the same problem that Clinton and the Democrats had: Trump raised the question of “who’s benefited?” The average German citizen has been repressed to pay for this. They’ve borne the burden. They walked into this; German people do not live on debt, with the lowest home ownership of any developed market because people don’t borrow money to buy things. They’re savers, and whole basis of Financial Repression Authority is talking about people who are financially repressed and the central banks decide to bail out. There’s a momentum to this; this is about what’s going on, and the Germans can’t do anything because they don’t control their currency and they don’t control the bank.

CENTRAL BANK ACTIVITIES AND COORDINATION

Coordination will break down because they’re all in different places. Kuroda’s put the Japanese in a bad spot. What do they do now? The curve has now started to steepen in Japan so they’re on this mission where they’re moving on with QE which weakens the currency. They’re going to have a problem. With the ECB, if Draghi were to pull back the QE, rates would rise dramatically in Italy, Spain, and Portugal. There are some serious issues with this and you can see the Fed going their own way now because they’re looking to fight a battle about exorbitant fiscal stimulus and suddenly they go hawkish. If the Fed were to move aggressively, Trump will respond by intervening on the Dollar.

The effect on the 10 year bond is unknown. If the Dollar rallies, everyone loves America again. If the US intervenes, the 10 year yield will go higher because people will start selling Dollar assets. It’s a very tough question and we’ll have to watch the Fed closely and economic fundamentals, but the curves are steepening all over the world. People are selling in the long run in anticipation of improved global growth.

Gold is good because the central banks have been married to this zero to negative interest rate, and they don’t know what to do. If they’re seeing the panic in any way, that’s what gold is good for. It’s amazing that gold is still up there when equity markets are rallying.

Abstract by: Annie Zhou <a2zhou@ryerson.ca>

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