Dollar Retraces Some of Trump’s Intervention Loss

Wednesday January 18: Five things the markets are talking about

Yesterday saw the biggest drop in the dollar across the board since last June on comments from the U.S President elect that the dollar was “too strong.”

Without a doubt, the election of Trump is making the dollar moves much more volatile. The current market focus onto the President elect’s more protectionist trade policies is challenging investors initial view that dollar will strengthen on the back of looser fiscal policy and tighter monetary policy in 2017.

With the lack of details thus far from the Trump team, the market is open to many interpretations – Does the President elects currency rhetoric suggest that the new U.S administration is about to adopt a weak U.S. dollar policy and attempt to talk down the currency to support the U.S. manufacturing sector?

Either way, dollar volatility has just become more pronounced.

Ahead of the U.S open, the dollars fall from grace has eased and with that the flight to haven assets overnight with moves in the yen, Treasuries and gold steadying ahead of Friday’s Presidential inauguration.

1. Equities mixed as investors seek guidance

In Asian, the markets lacked direction as investors deal with the uncertainties of ‘Trumponomics.’

It seems that the market prefers to take more of a neutral stance ahead of Trump’s inauguration speech on Friday. Will Trump tackle China in his first week and label the country a currency manipulator?

Japan’s Nikkei closed up +0.4% on the back of a weaker yen (¥113.14) during the session. Korea’s Kospi closed down -0.1% while the Aussies S&P/ASX 200 finished the day down -0.4%.

Elsewhere, gains in financials helped Hong Kong’s Hang Seng index breach the psychologically 23000 mark overnight, with the benchmark closing up +1.1%. In China, Shanghai rose +0.1% after the People’s Bank of China (PBoC) injected massive liquidity into the market (this was done to address continued nervousness following Monday’s sharp intraday sell-off sparked by the pace of approvals for initial public offerings).

In Europe, equity indices are trading mixed, but generally higher after U.K PM Teresa May’s speech yesterday and as earnings releases start to pick up across the region. Financial are trading mixed on the Eurostoxx 600, while commodity and mining stocks are trading lower on the FTSE 100.

U.S futures are set to open in the red (+0.1%).

Indices: Stoxx50 -0.1% at 3,287, FTSE +0.1% at 7,230, DAX +0.1% at 11,556, CAC-40 -0.3% at 4,844, IBEX-35 +0.2% at 9,410, FTSE MIB -0.2% at 19,259, SMI flat at 8,301, S&P 500 Futures +0.1%

2. Oil prices little change on production cut optimism

Oil prices have rallied overnight with a weaker dollar supporting the market, however, gains are somewhat limited by expectations that U.S. producers would boost output and negate some of the positives from OPEC’s production cuts.

Brent crude futures are up +23c at +$55.70 a barrel, while U.S. West Texas Intermediate (WTI) crude oil futures are trading up +22c at +$52.70 per barrel.

The market continues to focus on two key things, one, U.S production numbers and two, on the supply side – any news on OPEC countries unwinding their production promises?

Note: Under the November agreement, OPEC, Russia and other non-OPEC producers have pledged to cut oil output by nearly -1.8m bpd, initially for six-months, to bring supplies back in line with consumption.

Note: Due to the holiday shorten week U.S EIA inventory numbers will be published on Thursday at 11 am EST.

Ahead of the U.S open, gold prices (-0.4% to +$1,212.75) continue to hold atop of their two-month highs hit in yesterday’s session on uncertainty over Trump’s plans for the U.S. economy.

Elsewhere on Tuesday, silver printed a one-month high of +$17.20, while platinum hit a two-month high of +$992.90.

3. U.S yields look to inflation for support

U.S 10-year Treasury yields are recovering after suffering losses on Tuesday. The benchmark 10’s is currently trading at +2.346% from yesterday’s close of +2.327%. Yields found support from SF Fed Williams speech yesterday. He expects a “small boost to growth over the second half of this year or next year” from Donald Trump administration fiscal policies.

Note: There are several Fed officials speaking later today (Robert Kaplan and Neel Kashkari – two FOMC voting members) including Chair Janet Yellen.

This morning’s U.S. inflation data could be a catalyst for higher Treasury yields which should also benefit the ‘mighty’ USD the most against low yielders such as JPY and EUR.

4. Dollar retraces some of Trumps intervention loss

Naturally, yesterday’s focus was firmly on sterling and on the U.K’s PM Theresa May’s comments regarding Brexit. The GBP has since retraced a portion of its +3% gain from PM’s stance on Brexit. The violent moves higher in GBP (£1.1987 to £1.2405) would suggest the market appeared to have been excessively ‘short’ the GBP currency and covered the position after PM May noted that both Houses of Parliament would vote on the final Brexit deal.

Overnight, the pound has managed to retrace some of those gains somewhat supported by the overall view that U.K was prepared to walk away from negotiations should the terms turn out to become unattractive. GBP/USD is lower by -0.9% and trading just above the psychological £1.2300 level.

Elsewhere, Europe’s single unit (€1.0687) is slightly lower outright despite this morning’s Eurozone inflation final readings (+1.1%) confirmed a multi-year high ahead of tomorrow’s ECB meeting. Officials are expected to leave policy unchanged – expect President Mario Draghi to stress that inflation remains well short of the central bank’s target (+2%).

The Loonie (CAD$1.3075) is steady ahead of this morning’s Bank of Canada (BoC) interest rate decision at 10am EST.

5. The BoC to stand pat

The BoC is expected to leave its key interest rate unchanged (+0.5%) this morning following encouraging economic data and signs the business outlook may be improving.

Fixed income dealers are pricing in no changes to monetary policy from Governor Poloz for 2017, as the bar to cut interest rates appears again to be quite high.

On the flipside, with the slack in Canadian economy would also suggest that policy makers would require a spectacular to “the plus side” for them to ever consider raising rates anytime soon.

Note: The BoC slashed rates twice in 2015 in response to the sharp drop in global commodity prices, which hurt Canada’s energy exports and prompted many businesses to cut jobs and investment plans.

In his report, expect Governor Poloz to highlight the stronger jobs and export data that was released earlier this month, along with signs of an improving outlook for business investment.

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