Trump and Navarro upset FX apple cart

Trump and Navarro upset FX apple cart

Michael O’Neill


· US jobs report details undermine strong headline figure

· USDCAD may be close to the bottom, support seen in 1.2960-1.2990 area

· Trump and US trade official Navarro spark worries of "currency wars"

· An unfiltered US president Trump is biggest FX risk next week

The new Trump administration persists in generating worries about

global trade and "currency wars". Image: Shutterstock

By Michael O’Neill

US president Donald Trump and his National Trade Council head Peter Navarro upset the FX apple cart this week.

Trump said, “You look at what China’s doing, you look at what Japan has done over the years. They — they play the money market, they play the devaluation market and we sit there like a bunch of dummies."

Those words set the “rising sun” flapping in a gale of denial from Japanese officials. Japan’s prime minister Shinzo Abe even offered to explain Japan’s monetary policy to Trump.

On the same day, Navarro told the Financial Times that Germany is using a “grossly undervalued euro” to gain a trade advantage over the US.

German officials were indignant. Chancellor Angela Merkel said, “We will not influence the behaviour of the European Central Bank."

Those comments flipped the apple cart and the US dollar tanked.

Loonie soars as US dollar wobbles

USDCAD has retreated from its January 18 peak of 1.3388 after the Bank of Canada governor’s comments suggesting that rate cuts are still on the table. Since then, the Canadian data have been mixed, though December GDP was a touch higher than forecast. The USDCAD decline has been all due to a reversal in the US dollar’s fortunes.

At the beginning of 2017, expectations for a rising US dollar were widespread due to the risk that US interest rates could rise faster than forecast. That was because of Trump’s expected infrastructure spending and corporate tax cuts.

Since then, FX traders have revised their outlooks on assumptions that increased US protectionist policies and Trump’s "undervalued" foreign currency views would lead to a much weaker USD.

However, those fears may be unfounded. Trump has not announced his infrastructure plans or tax cuts. When he does, FX markets may be singing a different tune and the USD should turn bid.

There was nothing in this week’s Federal Open Market committee statement to suggest that US interest-rate hikes wouldn’t proceed as forecast, which should add another layer of support to the greenback.

In that environment, USDCAD is unlikely to decline beyond support in the 1.2960-1.2990 area,

USDCAD (daily) finding support

Source: Saxo Bank

The week ahead

President Trump and his lack of a diplomatic filter have injected a high degree of uncertainty into FX markets, and that may be even more evident in the coming week, due to a lack of top-tier US data on the calendar.

Australia could make the start of the week interesting with inflation data and retail sales reports ahead of Tuesday’s Reserve Bank of Australian interest rate decision. But the week will get started later than usual in New Zealand due to its Waitangi Day holiday on Monday.

Wednesday, China trade data will be in the spotlight, this data could cause more than a ripple because of Trump’s fixation on trade. The same will hold true on Thursday when Germany releases its trade data. Thursday’s Asian action will start with the Reserve Bank of New Zealand interest-rate decision which is the only major release for the day among G10 currencies.

The week will end with Canadian employment data and nothing of note from the majors.

Don’t forget New Zealand’s Waitangi Day national holiday

on Monday, February 6. Photo: Shutterstock

The week that was

The week was expected to be fairly wild. It had its moments.

Monday, the US dollar gapped lower at the Asian opening, because of Trump’s new immigration policy. He banned immigration from seven Muslim-majority countries. The move was accentuated by disappointment from the previous Friday’s US GDP report and Chinese New Year holidays.

The US dollar sank in Asia, recovered in Europe, and then dropped again during the New York session.

Oil prices were whipped around by optimism that Opec production cuts would work and pessimism over the prospect of increase supply from rising US rig counts.

Tuesday got off to a quiet start in Asia, and even a Bank of Japan policy meeting couldn’t spark any excitement because the BoJ delivered what was expected.

EURUSD see-sawed within a narrow range until better-than-expected Eurozone GDP and inflation data gave it a modest bid, which accelerated after New York opened.

UK data did not help Sterling. Weak consumer credit contributed to a sharp drop in GBPUSD from 1.2515 to 1.2409. It bounced in early New York trading.

The New York session was messy. The dollar dropped across the board on a mix of dollar selling for month-end portfolio rebalancing and comments from Trump and his trade advisor, Peter Navarro. Navarro complained that the euro was undervalued, giving Germany an unfair trade advantage. Trump told pharmaceutical companies that currency devaluation by other countries led to US drugs being produced offshore. Traders told themselves “currency wars”, and the dollar dropped.

EURUSD jumped to 1.0809 from an overnight low of 1.0684. USDJPY dropped to 112.08 from 113.95 in the same time period.

Wednesday was FOMC day. USDJPY opened with a bid on speculation that the Fed statement would lean toward hawkish. It didn’t. Kiwi got wacked on a weaker-than-expected employment report. EURUSD traded sideways in a narrow range. The Trump administration’s reference to Germany and Japan as “currency manipulators” underpinned the single currency. Sterling extended the previous day’s gains and ignored a dip in UK manufacturing PMI.

The US dollar inched higher in New York ahead of the FOMC statement helped by a strong ADP employment report and positive manufacturing PMI reports. EURUSD dipped to 1.0730 from 1.0806, while USDJPY climbed to 113.98 at option expiry time and then touched 112.80 after the FOMC announcement. At the time, the FOMC statement was viewed as a non-event and, if anything, modestly upbeat.

On Thursday, Asia’s reaction to the FOMC was to sell dollars across the board. The Australian dollar got the ball rolling and was the best-performing G10 currency thanks to help from a better-than-expected trade report. The Japanese yen was a close second. In Europe, EURUSD broke 1.0800 and hit 1.0828 in early New York trading.

GBPUSD traded sideways ahead of the Bank of England’s interest-rate announcement. The BoE left rates unchanged. GBPUSD plunged to the overnight low (1.2624) when BoE governor Mark Carney implied that even a low unemployment rate wouldn’t lead to higher interest rates in the near term.

ECB president Mario Draghi blamed governments for their countries’ economic woes. He also said that benefits from leaving the euro were a mirage.

Even oil prices rallied despite Wednesday’s report from the US Energy Information Administration of another large build-up in US crude inventories.

The US dollar retreat ended when New York walked in and closed the day with very modest gains against the G10 spectrum. Speculation of a higher-than-forecast nonfarm payrolls report fuelled the dollar demand.

On Friday, the US nonfarm payrolls headline figure lived up to expectations, but the details did not. The US dollar was trading on the defensive as Europe closed for the week.

Markets are still getting to grips with a new, unfiltered

reality. Image: Shutterstock

— Edited by John Acher

Categories FX, Foreign Exchange, Currency, Canadian Dollar

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