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Riding the Trump Train

News   •   Feb 28, 2017 11:27 SGT

I suspect we’re entering some extremely volatile times for the USD. While the reflationary aspect of US fiscal spends in itself is a compelling argument for a stronger dollar, when combined with Corporate and Border Tax reform it should be a no-brainer. There remains a high level of uncertainty about the new administration's fiscal policies especially following President Trump's recent remarks on the strong dollar directed at China. If you think about it, the strong USD runs counter-intuitive to President Trump's trade policy; adding another level of uncertainty. Add in the Federal policymakers, who appear no more certain about the 2017 interest rate cycle than they were in 2016, then we could be in for an extended yo-yo period in both USD and risk sentiment. Instead of investors piling back into the dollar, the market is more likely to pile into the volatility trade, given the muddled economic and political landscape. While the reflationary trade makes for a credible, strong dollar storyline, I suggest bracing for an extended period of dollar volatility to the extent that we have not experienced in years.

The markets have priced in huge expectations, so Trump’s fiscal policy will remain in the limelight. However, there could be more disappointment for dollar bulls this week, especially from those who were banking on the president charging out for the gates on Fiscal and Tax Reform. Indeed, there is growing discomfort from Investors who continue to seek confirmation to buttress their long USD and higher global rates bias.

Currency markets have opened with a whimper today, but dealers are finding few compelling reasons to re-engage dollar longs as the path of least resistance appears lower for the Greenback. Mind you, there is not a great argument to suggest the USD is overvalued either, but with traders in sell mode, after the inauguration fall out mode, I suspect the US dollar will feel the dealer’s near-term angst.

On the trade front, there were no surprises that the new US administration strategy to protect American jobs would start with withdrawal from the 12-nation Trans-Pacific Partnership (TPP) trade pact.

Australian Dollar

The AUD is holding up remarkably well and has benefited greatly from the unwind of the Trump trade and hot commodity markets. So much so that the currency is being affectionately labelled on ‘the street’ as the ‘EURUSD’ of the South Pacific, in comparative reference to the Euro’s longstanding resilience. While I expect the AUD to hold short-term, the top side may be limited in the face of a possible increase in risk aversion, as political uncertainty looms. US trade policy appears to be at the head of the queue for the incoming administration. If you needed any confirmation of this fact, the Trump mantra that came across loud and definite at the inauguration, was “BUY AMERICAN & HIRE AMERICAN”.

The AUD is opening unchanged from Friday’s NY close. While there is growing pressure from the possibility of a resurgent USD, the near term outlook for the AUD should remain on stable footing, supported by Friday's China GDP growth, which remained strong and will support the Aussie’s current ‘run in the sun’.

Traders will turn to this week’s domestic CPI, which should also limit downside, as the market is expecting a rise to .5 % from .3 % on the surge in food prices.

The ASX opened with a slight bid tone, but that was quickly faded, taking its cue from the S&P mini future contract, which opened flat after Friday. The fallout for Trump’s trade policy is expected to weigh on local sentiment.

Japanese Yen

USDJPY is still the favoured trade to express dollar bias. In the lead-up, USDJPY tested the 115.40-50 zone before Trump took the stage and proceeded to slide to 114.20, as traders quickly turned to 2017’s preferred strategy of selling the inauguration risk.

Core positions remain much lighter than in early 2017, and with little expectation for an event-driven risk, fast money traders were quick to cover their shorts at the intraday technical edges, happy to take risks into the weekend.

The focus will now turn to just how the new administration will deliver Fiscal and Tax policies, which will be at the core of Trumpenomics, and that markets cheered favourably for post-election.

Most likely, early trade will be to sell the USDJPY, given the absence of clarity on Trumpenomics, and risk aversion will likely to re-emerge. Yen traders are taking their cue from the Nikkei, which is trading with a softer bias.

Chinese Yuan

The Yuan is trading without direction, stuck in the quagmire of US policy uncertainty. But with funding cost normalizing, we should see a convergence of USDCNH and USDCNY rates.

The PBOC is singing a happy song now that their iron-fisted policies in both currency and capital controls have reduced capital outflows to a dribble. Look out for the CNH to trade in line with broader USD sentiment.

Regarding China's temporary RRR cut for the big 5 banks and last week’s enormous open market operations: the key is that it is little more than a cash management injection to prevent cash squeeze before Lunar New Year.

Euro

Despite Draghi sounding less hawkish, the EUR remains supported due to US economic and political uncertainty. Friday’s break of 1.07 could be an ominous sign that a further squeeze on EURUSD shorts is in the cards. Traders are focused on the key 1.0720 pivot, which is within striking distance, as the dollar has opened with an offer tone early in APAC trading.

Pound

It was a very hectic week for the Pound and we now find ourselves back to square one for the month, virtually stuck in no man's land. I expect some interplay off broader USD momentum and that Cable is a play in its own right. With the latest best case Brexit scenarios fully priced, despite glimmers of hope for the pound at week’s end, I expect a ‘sell the GBP’ rally to return to vogue as the messy affair unfolds. An essential outlook for Sterling watchers will be the Supreme Court ruling on Brexit, due 24 January.

UK’s PM Theresa May and US President Donald Trump will meet on Friday, January 27 in Washington. High on the agenda will be US-UK trade relations as PM May begins her road show, aimed at instilling investor confidence, by increasing trade ties between both countries while working towards a new “passporting” deal between American and British Banks.

WTI

A meeting of the OPEC Ministerial Monitoring Committee went well, as by all indications the production cuts have been deeper and faster than expected. There are media reports that the cartel’s output cuts are ahead of schedule. The WTI has opened 20 cents higher, but momentum is lacking in early thinly traded markets.

EM ASIA

Markets remain very whippy, characterised by extreme moves, but I view the Local EM FX more exposed to, and less insulated from, US policy. The market's sensitivity to US policy will reflect in near-term underperformance. However, there are still pockets of appetite to sell USD extremes along the forward curve in local currencies like IDR and KRW, but I suspect this is more in line with the Bond and Equities Market valuation play, as opposed to outright currency speculation, but overall inflow remains tepid across the region.