When the data just doesn’t count 27Jan17

When the data just don’t count

Michael O’Neill

FX Consultant / IFXA Ltd



· GDP misses, Durable Goods Orders mixed, US dollar doesn’t care

· Chinese New Year will lead to subdued Asian trading next week

· President Trump is the ringmaster of the White House circus

By Michael O’Neill

It may seem sacrilegious to suggest that next week’s US data and Federal Open Market committee meeting just don’t matter to FX markets, but they don’t.

President Donald Trump has usurped the center ring of the financial market circus from the FOMC and he will not be relinquishing it any time soon. It is easy to draw parallels between today’s White House and his reality series, “The Apprentice

For starters, both featured lines of people hoping to curry favour with the new “boss”.

The Apprentice selected contestants from a long line of hopefuls competing to win the grand prize of a contract to work for one of Trump’s companies. There were long lines of people hoping to become a contestant.

The White House under president Trump has taken that premise to another level. There are long lines of career politicians vying for a meeting and/or a phone call from the new leader of the free world.

It is hard to forget the photo of a groveling Mitt Romney dining with president-elect Trump. At the time, the secretary of state post was up for grabs. Romney was not a fan of Donald Trump. He called him dangerous, mocked his business acumen, and said his views on ISIS and Assad were ridiculous. He said that when it came to foreign policy, Donald Trump wasn’t smart.

However, the lure of black SUV convoys complete with lights and sirens, a secret service protection detail, and the power that comes with the title of secretary of state were so alluring that Mitt Romney changed his tune after the dinner. In fact, CBS news described his words as “effusive praise for president-elect Donald Trump”.

There is no evidence that that Trump ever said the words “you’re fired”, but Romney hasn’t been seen since.

"Bad idea, folks. The worst. Many say so!" Photo: Shutterstock

World leaders are hoping to curry favour with the new president. Witness, for example, UK prime minister Theresa May’s fawning speech to the Republican party in Philadelphia on January 26. Canada’s Justin Trudeau, Japan’s Shinzo Abe, and Russia’s Vladimir Putin are also in queue, awaiting their opportunity to pay homage.

Mexican president Enrique Nieto has already been "fired” and Chinese president Xi Jinping is in the crosshairs.

That kind of geopolitical drama shoves this week’s FOMC meeting to the bottom of the pile of financial market concerns. Friday’s US Q4 GDP print of 1.9% was a tad below expectations as was the Durable Goods report. Today’s data won’t do anything to change the FOMC outlook.

The Fed just hiked rates in December while bumping up the dot plot forecast and not enough time has passed to cause any adjustments to their view.

The week that will be

Buckle up! FX markets may be in for a wild ride. This week is chock full of major data releases and three major central bank meetings. Liquidity will take a hit, especially in Asia due to the Chinese New Year’s holidays and then there is President Trump. The best laid trades of mice and men can be laid to waste with a single tweet from @realDonaldTrump.

Monday, a large swath of Asian markets may be missing from action. New Zealand trade data and Japan retail trade reports will provide trading fodder for NZDUSD and USDJPY. That, in turn, will set the stage for a lively European session due to a host of data from Germany and the Eurozone. US data releases include Personal Income and Expenditures, but these should not be real factors.

Tuesday’s focus will be on the Bank of Japan policy decision and outlook report. Eurozone GDP data will headline a slew of reports from Europe and the UK.

Wednesday starts with China PMI data with Eurozone and US PMI data following. FX reactions to these reports may be overshadowed by the FOMC meeting. Traders expecting fireworks from the statement will likely be disappointed. The committee members will need to see how Trump’s executive actions impact the economy.

Thursday’s FX session will be all about the Bank of England interest rate decision and Quarterly Inflation Report. A modestly hawkish report could ignite another round of GBPUSD short covering and hang a target on 1.3000.

Friday finishes the week with a slew of data releases in the US that will largely be ignored because the FOMC meeting just passed.

The week that was:

President Trump was expected to be the focus of FX markets this week and he certainly didn’t disappoint.

Monday, Asia started by unwinding Friday’s EUR and USD rally. The lack of any hard details in president Trump’s inaugural speech led to US dollar selling.

Sterling caught a bit of an extra bid ahead of Tuesday’s UK Supreme court decision to decide if the government needed parliamentary approval for Brexit. Trump formally withdrew the US from the Trans-Pacific Partnership.

That news, combined with a headline about Treasury Secretary nominee Steven Mnuchin warning that an excessively strong dollar was negative in the short-term, drove the US dollar down across the board by the end of the New York session.

Tuesday, Asia continued to sell US dollars. USDJPY dropped to the overnight low of 112.53 and EURUSD climbed from 1.0740 to 1.0773. The greenback recouped most of the losses during the European session.

The UK supreme court ruled that the government needed a parliamentary vote to trigger Brexit. GBPUSD traded erratically in a 1.2435-1.2535 range around the news and finally settled in at 1.2435 when New York started.

The day ended with Trump signing an executive order to revive the Keystone XL pipeline which had been cancelled by former president Obama. The Canadian dollar and equity indices had a good day and were higher at the close.

Wednesday, AUDUSD got hammered in early Asia trading following the release of a weaker than expected inflation report. However, the initial losses were fully recovered when New York started trading. Better-than-expected Japanese trade data undermined USDJPY, but only briefly.

Sterling climbed in a continuation of the previous day’s short squeeze and encouraged by the better visibility around the UK’s Brexit plans.

A sort of clarity. Photo: Shutterstock

Trump had traders on edge after he tweeted “Big day planned on NATIONAL SECURITY… among other things we will build the wall”. Wall Street was not concerned. The Dow Jones Industrial Average cracked 20,000. Sterling continued to move higher and closed in New York at 1.2635. The US dollar finished the day on the losing side of the equation (except against CHF) as US data releases were trumped by Trump.

On Thursday, bearish dollar sentiment was evident in Asia although trading was a little subdued due to the Australia Day holiday. A higher-than-expected inflation report lifted NZDUSD.

The bearish dollar sentiment turned to bullish when the European day started. Rising long-term bond yields and equity prices led to renewed US dollar buying. The sterling rally finally came to an end, helped by an EU official’s warning that Britain would notice a more pronounced impact from Brexit in 2017 and 2018.

The New York session was a tad whippy on the back of rising protectionist fears. The plans for a wall between Mexico and the US led to the Mexican president cancelling his meeting with Trump. The White House press secretary said later that president Trump planned to implement a 20% tariff on all goods imported from Mexico.

At the end of the day, UK PM Theresa May addressed the Republican party in Philadelphia. She appeared to be trying to curry favour by reminding the politicians of the UK and US’ long-standing ties.

Friday, a miss in US Q4 GDP data and an as-expected Core Durable Goods report created a minor stir and then was quickly forgotten.

— Edited by Michael McKenna

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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