The United States Dollar sold off sharply overnight and is trading weaker against nearly all currencies this morning across the G10 and emerging markets.
Overview
President Donald Trump’s speech to the Davos Economic Forum sent shock waves through markets yesterday, with broad points ranging from relations with China to interest rates to oil prices. Trump also spoke to Fox News later last night with more specific comments on Chinese trade relations, giving risk assets a boost. Equities are opening higher around the world today as the Buck takes a beating and trade in its weakest ranges this calendar year – the S&P 500 has rallied 2% this week and is seeing the ‘best start’ for a President since 1985.
Trump’s comments on China are far and away the biggest driver of USD’s drop this morning after the new President appeared to dramatically soften his approach toward the world’s second-largest economy. In his speech at Davos, the President mentioned that he anticipates a “very good relationship” with China, which is a marked departure from the sustained hostile rhetoric of his campaign. His Cabinet appointments, too, point toward a more hostile approach especially on trade policy, but markets do now see some room for warmer relations between the world’s two largest economies. Trump doubled down on Fox News later last night, emphasizing that tariffs on Chinese exports do remain possible but he would “rather not” levy them. This sparked a broad relief rally across all asset classes and has driven USD’s selloff in a big way this morning. Trump also mentioned during and after his speech yesterday that he would be pushing the Federal Reserve to lower interest rates immediately, saying offhandedly that he has a better understanding of interest rates than the Fed’s voting members and Chair Jerome Powell. Though the Fed is in its blackout period before next week’s decision where rates are widely expected to stay steady, markets will without a doubt be watching Powell’s press conference for any discussion of Fed independence and calculated impacts of a potentially softer trade policy. Of course, it’s still possible that the Trump administration does enact punitive tariffs on many major economic regions regardless of this new softened tone, which could be more damaging as such actions are now less priced into risk premiums.
The Eurozone and UK also released their Producer’s Manufacturing Indices this morning, all showing a slightly rosier economic picture than previously anticipated. Though the Eurozone’s levels are still close to their lows in Q4 of last year, any slight improvements from both the EU and the UK do point to a better global growth picture and may take some of the heat off of central banks set to meet in the next two weeks. The US’s figure is to follow later this morning, expected to show little change from last month. Though this week has been quite busy just from commentary from the new administration, next week promises to bring the fireworks as central banks around the world follow the Bank of Japan’s rate decision overnight.
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What to Watch This Week…
- Federal Reserve Rate Decision, Wednesday 2PM
- Bank of Canada Rate Decision, Wednesday
- Eurozone GDP Thursday
- European Central Bank Decision, Thursday
- US PCE Price Index, Friday 8:30AM
- Monex USA Online is always open
MXN ⇑
Though still trading stronger than immediately preceding Donald Trump’s inauguration Monday afternoon, the Loonie is losing a bit of ground this morning against the Buck to the tune of a tenth of a percent from yesterday’s close. Canada released retail sales for the month of November this morning, showing no growth. Retail sales excluding autos actually contracted by 0.7% from October, and the prior month was revised downward to show a contraction as well. The Bank of Canada, also meeting next Wednesday, is widely expected to cut interest rates by 25 basis points to support the sluggish economy.
JPY ⇓
Japanese Yen whipsawed overnight, swinging between gains and losses, but ultimately has settled this morning trading roughly a quarter of a percent weaker against USD than at yesterday’s close. The Bank of Japan did raise interest rates by 25 basis points last night, taking Japan’s key interest rate to its highest level in more than 17 years. BoJ head Kazuo Ueda, though, struck a much more moderate tone in his press conference than markets were bracing for – just hawkish enough to keep the Yen afloat, but not so hawkish as to spark global panic similar to the flash crash markets saw following the BoJ’s surprise hike in August. The global relief rally from President Trump’s words yesterday also caught the Yen off guard, and kept any positive moves off of the BoJ’s move fairly muted.
