FX Trade Strategist / www.Loonieviews.net
· Nonfarm payrolls do not impress, US dollar dives
· Trump puts climate change policies under the microscope
· Next week will set the FX tone for the summer
The Trumpschach test, climate change edition: Inspiring step towards a world of multilateral cooperation, or a bunch of suits shaking the US down for money? Photo: Shutterstock
By Michael O’Neill
The US dollar got knocked for a loop when the expected-to-be strong nonfarm payrolls report was nowhere to be found. Instead, traders got a print that Saxo Bank’s John Hardy described as "ugly virtually across the board".
President Trump had the same effect on oil prices which dropped 4.3% since midday in New York on Thursday. Rising oil production in Libya and Nigeria, as well as the idea that US drillers can proceed unfettered by inconvenient carbon taxes on their product, raised fears of another oil glut.
A kind of a chill across the globe
President Trump pulled the US from the Paris Agreement as promised. Predictably, the majority of the press are choking on their words as they express their outrage.
In my opinion, it’s a bit of a farce. The Paris agreement merely sets a goal for reducing global warming to less than two degrees compared to pre-industrial levels. How each country determines their contribution is up to them. There aren’t even any deadlines to set specific targets – it’s hardly science, and hardly law. It’s a fluffy accord.
There is, however, very real anger in governments around the world. Most of it is because the US would have been the largest contributor to the Green Climate Fund. According to the GCF’s pledge tracker, as of May 12, 2017, the US had pledged $3.0 billion of the $10.132 billion in pledges. The loss of that money means a whole lot of bureaucrats high-paying, cushy jobs may be in jeopardy
Trump says that the Paris accord transfers are more less about the climate and more about other countries gaining a financial advantage over the US. He singled out China and India saying neither have plans to reduce greenhouse gas emissions. He has a point.
It is hard to argue against any plan created to save the planet. The problem, as always. is the politicians.
In Canada, for example, the Liberal government is a huge supporter of the Paris accord. But if you think it is because they believe they trying to save the planet, you still believe in Santa Claus. The government gets to cloak increased taxes in the garb of environmental protection.
It is a blatant tax grab.
The Province of Ontario is a perfect example. Their cap and trade scheme, sold as revenue-neutral, transfers an additional $2 billion per year into government coffers.
Taxpayers pay more for home heating, transportation, as well as all the increased costs passed on to them by business. In addition, provincial sales tax revenues increase because of the higher product price.
It also puts Canada at a competitive disadvantage versus America. Why would China buy carbon-taxed Canadian crude when they can get lower-priced American crude?
If Canadian companies are saddled with added costs from carbon taxes while American companies are exempt, Canadian businesses risk being priced right out of the American economy.
The loonie would not fare well in that environment.
Source: Saxo Bank
The week ahead
This week could start slow and finish with a bang. There are data risks, central bank risks, and UK political risks… and a lot of them are concentrated in the last two days.
On Monday, Asia will get off to a slower start thanks to a holiday in New Zealand. It is also Markit Services PMI Day in China, the Eurozone, the UK, and the US.
Tuesday, the Reserve Bank of Australia is expected to leave interest rates unchanged and provide a mildly positive tone in the statement. The rest of the day may be dull. There isn’t much in the way of data in Europe or the US, leaving traders to fret about upcoming events.
Wednesday,will shape up like Tuesday. Australian GDP data could give AUDUSD a boost. The impact from Eurozone GDP data may be muted due to the European Central Bank meeting the next day. The US data cupboard is almost bare ensuring another quiet session.
Thursday, the UK election will be the focus but since the results won’t be known until after the New York close, the ECB will hog center stage. The tone of the statement and Mario Draghi’s press conference will be key. Traders seem to be anticipating/hoping for a change in Mario Draghi’s dovish tone. The reaction could be huge.
Watch this space. Photo: Shutterstock
In addition, traders will have to deal with trade reports from Australia, Japan, and China. New York traders will be distracted by former FBI director James Comey’s testimony to Congress.
Friday, GBPUSD will be explosive in thin Asia markets, depending upon the result. The election will overshadow a slew of UK economic releases including CPI, PPI, and trade. The week will finish with Canada ‘s unemployment report. There aren’t any major data from the US.
The week that was
It was a short week; it was a busy week. At least that is how Dickens might have described it…
Monday was mostly a write-off due to holidays in China, the UK, and the US. USDJPY gapped lower at the open on early risk-aversion jitters due to another North Korean missile launch, but the gap was quickly filled. EURUSD inched lower on a dovish Draghi speech where he said stimulus was still needed.
Tuesday, it was back to work for everyone except for China. Traders reacted to Draghi’s remarks in Asia and sold EURUSD from 1.1170 to 1.1104 just before Europe opened. Europeans had a different opinion and EURUSD was at 1.1165 when New York started. New York extended the rally to 1.1205 after a soft US consumer confidence number and it finished the day at 1.1155.
A Reuters story citing “sources” suggested that the ECB would adopt a less dovish tone in the next policy statement gave added support to EURUSD.
Oil prices drifted lower, undermined by a Goldman Sachs report that lowered the 2017 average price for crude to $52.39/barrel from $54.80/b – which as forecasts go, is very precise.
USDJPY traded choppily inside a 110.65-111.20 range and finished the day just above the low. UK polls showed the Conservative lead over Labour shrinking rapidly, putting downward pressure on sterling during the New York session. GBPUSD dropped from 1.2885 to 1.2840 by the end of the day.
Wednesday, traders had to deal with another UK poll, month-end portfolio rebalancing flows, and a new word from president Trump (covfefe).
In Asia, GBPUSD plunged from 1.2857 to 1.2790 when a UK poll predicted a hung parliament. Elsewhere, a better-than-expected China Manufacturing PMI gave AUDUSD and NZDUSD a short boost which continued throughout the European session. USDJPY recouped all of Tuesday’s New York losses and EURUSD stayed rangebound. Canada Q1 GDP at 3.7% was as expected, but traders focused on falling oil prices.
US economic data were mixed and were unable to offset month-end US dollar selling against EUR, JPY, and GBP. Sinking commodity prices drove the commodity bloc currencies lower.
Thursday was a new month, but Trump was up to his old tricks. Late in the day, he announced that he was taking America out of the Paris accord. FX markets didn’t seem to care but Wall Street reacted by buying equities.
The day wasn’t just about Trump. In Asia, a weak Caixin China PMI report trumped a strong Australia Retail Sales report and sent AUDUSD tumbling from 0.7452 to 0.7386. Kiwi tracked AUDUSD down. UK election concerns weighed on GBPUSD which bottomed out at 1.2830 when New York opened.
USDJPY recouped the previous day’s losses on fresh US rate hike concerns. EURUSD traded sideways as New York bought US dollars. Stronger than expected ADP employment and robust ISM Manufacturing PMI data were the catalysts. Traders ignored more “bad news for PM May” UK polls and bought sterling.
Friday was nonfarm payrolls day. Earlier labour reports suggested that the print would surpass expectations, and intraday traders appeared positioned that way. Alas, it was not to be and the US dollar got walloped.
Sterling bounced on the NFP data but UK polls warning that the Conservative majority may be at risk weighed on the currency. USDJPY crashed with traders discounting an aggressive Fed policy .
Some of the rage and anxiety over Trump’s Paris accord decision relates to scenes like these. Some, however, relates to more… pecuniary concerns. Photo: Shutterstock
— Edited by Michael McKenna