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Trump Impeachment Is 'Noise' Investors Should Ignore

Trump Impeachment Is 'Noise' Investors Should Ignore

By    |   Monday, 28 October 2019 09:55 AM

In the world of geopolitics something big has happened over the weekend.

On Sunday, President Donald Trump has announced that Abu Bakr al-Baghdadi, the leader of the so-called Islamic State has died after a U.S. raid in Syria that was carried out by American Special Forces and was hereby the most significant counterterrorism raid since the killing of Osama bin Laden in 2011.

The event is expected to have no impact on financial markets and thus for investors.

In the meantime, President Trump’s impeachment process continues and for investors it’s important to keep in mind that ‘if’ President Donald Trump’s approval ratings don’t weaken further due to the ongoing impeachment process, because if that would be the case then that would be more than probably bad news for the U.S. dollar.

So far, and under today’s conditions, investors can discard this whole impeachment ‘show’ as noise. President Donald Trump is still far from being ousted.

It could be helpful to take look back for a moment to the value of the dollar index (DXY) and for example President Donald Trump’s 3-month average approval rating where we see that both reference data move, broad-based of course, in the same direction.

Yes, one could say, what’s good for President Donald Trump is good for the dollar.

Besides all that we have and also in the context of the value of the U.S. dollar we have now the Federal Reserve’s new program of Permanent Open Market Operations or POMOs that are one of the tools used by the Fed to implement monetary policy and influence the American economy.

POMOs are the outright purchases (or sales) of securities for the system open market account (SOMA), which is the Federal Reserve's portfolio.

Now, investors could do well keeping in mind that the newly initiated POMO program of buying T-bills is ‘not’ a new Quantitative Easing or QE program. What the Fed does is it injects bank reserves via Treasury bill purchases and hereby grows its reserves in the process so that it’ll be able to wind down its Temporary Open Market Operations or TOMOs.

This, and other endogenous factors will continue to absorb liquidity, which means that the $60 billion/month purchase pace should not be extrapolated to corresponding growth in bank reserves or excess liquidity.

All this is interestingly reflected in the somewhat better performance of the U.S. dollar that had weakened when the Federal Reserve announced the liquidity injections in its new program of Permanent Open Market Operations or POMOs.

No, and looking at it from things angle, investors shouldn’t expect further surprising dollar weakness.

Finally, the market’s somewhat dollar bearishness has also been pared somewhat, in the light of latest Brexit news.

In the interminably tedious EU-UK divorce process there are a couple of developments to look at.

  • Firstly, the European Union is expected to agree an extension of the ‘exit date’ to January 1, 2020. This had been expected in the financial markets and it will not create a strong reaction.
  • Secondly, there is the possibility of a UK general election being called for December 9.

The opposition parties, the Liberal Democrats and the Scottish Nationalists have proposed a bill to allow this, which should be voted on Tuesday.

Another opposition party, the Labor Party, is opposed, but that is not enough to stop the process.

Markets are expecting an election and the idea here is that having an election with an EU-agreed delay in place would then allow a ‘new’ Parliament more time to scrutinize the EU-withdrawal agreement.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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Trump Impeachment Is ‘Noise’ Investors Should Ignore
trump, impeachment, noise, investors
Monday, 28 October 2019 09:55 AM
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