Trade Update – Mueller investigation thoughts

Friday was a tough day for me.

Firstly I squared up my short AUD and NZD positions (positions that I doubled on Thursday anticipating a tax bill passage), then went long Gold.

These decisions largely followed the ABC News report that said that Flynn was prepared to testify against Trump.  Something that they later retracted.  And the reporter has been put on suspension for 4 weeks.

I was trying to hold these positions despite the Flynn plea deal announcement, hoping that it would not over-run the tax bill progress.  However, the ABC report appeared to open the door to impeachment proceedings, so I decided to reverse my call.  However, the Flynn news turned out to be less dramatic, allowing the tax bill progress to regain its dominant influence.

Nevertheless,  I decided to stay with my risk off, weaker USD position, to see how things unfolded over the weekend.

The result of Flynn’s plea deal still places increased pressure on the Trump administration.  We can assume this will expand into something else.

On 30-Oct, it was announced that Papadopolous also has a plea deal with Mueller and he was involved with communicating with Russian connections before the elections, discussing setting up meetings with Russian and Trump campaign officials, while he was a foreign policy advisor for the Trump campaign, and Russian offers of “dirt” in the form of Clinton emails to the campaign.

These may be the same hacked emails released by Wikileaks during the election campaign.

At the same time, and probably not coincidently, former Trump Campaign Chairman Manafort and his long-time associate and a campaign advisor, Rick Gates, were also charged with money laundering.  While they are not yet reported to be cooperating with Mueller, the timing of their indictment might suggest Papadopolus was communicating with one or both of them about Russian offers to help the campaign.

It is reported that Flynn was in contact with Jared Kushner, son-in-law of Trump, during the transition, and he was essentially directing his contact with Russia.  While this alone might not be enough for impeachment action against Trump for collusion, Kushner has been under a lot of scrutiny by Mueller for his contact with Russians during the campaign.

Trump has argued on Twitter over the weekend that Flynn’s contacts with Russians in transition were legal.  And many would argue Trump has a right to begin foreign policy communication as the President-elect.  Although it might be in violation of the Logan Act, few believe this is enough to warrant action against Trump.  If the investigation was to be stalled there, it might not matter much.  That said, the context of the contacts – Russia sanctions and UN resolution related to Israel – were in direct conflict with Obama’s policies, and some may see this as very specific interference with sitting government policies; a significant case of violating the Logan Act.

Mueller is investigating Kushner, using info gathered from Flynn and Papadopolous and is looking to gain leverage over Manafort and Gates.  Kushner had several meetings with and was sent emails from Russian actors.  He has denied any collusion and has been under pressure from investigators and congressional hearings.  It is quite possible, perhaps even likely, that Mueller has got Kushner caught in a lie, or at least has testimony from Flynn that says he has lied.  So we should not be surprised at some stage if Kushner is indicted.  This would be seen as bad news for the Trump administration.

It is likely that the Mueller investigation will continue to feature in US politics for some time.  He appears to be looking hard for evidence of Trump campaign collusion with Russia during the campaign.  There are smoking guns and evidence may be found, or at least a good prima facie case made, that there was collusion.  There is also prima facie evidence that Trump fired Comey because he was barking up the same tree.

Trump and Republicans in Congress went hard over the weekend to revive the calls for investigation into Clinton and trying to discredit the FBI and DoJ.  This appears to be driven by an attempt to counter the progress of the Mueller investigation.  This adds to the murky and conspiratorial battle underway in US politics.

Does any of this matter?  If tax reform is passed, perhaps it will dominate market direction.  But as I wrote in my report on Friday, the USD has suffered all year, despite the tax reform and strong US economy.  It fell in November, since the Manafort/Papadopolous news, and speculation that Flynn had been turned, despite rapid progress on tax reform that appeared to help boost the US equity market.  As such, it appears that while stocks are following the tax news, the USD is following the unfolding Mueller investigation.

Perhaps my position in gold is doomed with equities strong, and perhaps the FX market will give the tax reform progress more attention for a while.  But the upside for the USD may be constrained by what is likely to be ongoing pressure from Mueller on Trump and Trump efforts to discredit Clintons and the FBI.

Overall, politics is ugly in the USA and is getting uglier.  We have the debate over a new Continuing Resolution this week, and the Alabama Senate election next week, with the Republican candidate under a cloud over alleged sexual misconduct.

I have been arguing that tax reform and a strengthening US economy may see a revival in the USD. The tax reform progress does seem more real now, perhaps it will start to drive the narrative, but politics has played a big part, it seems, in undermining the USD.

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Greg Gibbs,
Founder, Analyst and PM
Amplifying Global FX Capital Pty Ltd