Politics will be in focus this week with President Trump addressing a joint session of Congress on Tuesday. While the recent dollar ranges remain intact, the Greenback is on the verge of a broader surrender. Dollar bulls who were beating the tax reform drum are now faced with a somewhat slower timeline than expected, which could ice dollar demand if President Trump does not offer further clarity on the tax proposal. This now leaves dealers begging the question if the US administration will live up to the market’s towering expectations on tax reform. Expect a topsy-turvy Tuesday to lead into wicked Wednesday for the Trump Trade if the President does not fire on all economic cylinders.
The USD could feel serious pressure near term. Market sentiment is starting to turn on the Trump trade hard as it appears the administration is lacking the political movers and shakers that might be necessary to negotiate the key initiatives. If the USD comes under threat post the Congress address, there will be no amount of hawkish Fed rhetoric or bullish economic data to assist the cause of the dollar, as it's going to take a March rate hike to keep the USD trade viable.
Keep your head down as things could get messy on the Euro. Outside of the Trump event, EU risk should continue to dominate sentiment. The peculiar duality in France continues to unfold, with a mixture of populist and intellectual discourse keeping Parisian coffee shops abuzz with political banter while the divisive run up to the French elections unfolds. All the while global capital market participants remain on edge. This uncertainty is hanging over the EU like a dark cloud and could cripple investment flow into the continent. With EUR crosses joining the fray, it is certainly pointing to broader EUR weakness.
The Australian dollar simply does not trade ably above .7700 and after another failure to break above .7750 , this suggests there will be more interest to sell in this area on rallies. Price action has been a let down on the crosses of late, with the AUD feeling the weight of risk aversion and as the Yen is seeing inflow from all major crosses, including the Australian Dollar. Given most of the G10 currency ranges remain intact, I think the Australian dollar will continue to honour near term ranges as well. There is no imminent cause for alarm with US 2 through 10 year Bond yield sagging, as that should keep the Aussie yield appeal in place. In addition, the RBA appears comfortable with the current domestic conditions and policy levels. As such, I suspect it will take a huge miss in CPI to pressure the RBA into a rate cut scenario.
USDJPY has now broken through support at 112.50. If this current move picks up steam we could see a continuation to 111.60. EU political risk aversion is playing out through EURJPY, as Yen crosses come into favour and political risk in EUR heightens. For the dollar in general, I think we’re still a long way off the tipping point, which I view as the 110 level. However, a move towards that zone could trigger a broader US dollar capitulation.