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The art of the "jawbone"

Official pronouncements on currency valuation tend to have their greatest impact when markets are already trending. So it was last night, when Secretary Mnuchin’s comments provided a catalyst for another significant leg down in US Dollar exchange rates.

The sell-off in the US Dollar is likely to have implications for the Australian share market today. Stocks with major US investments may encounter currency headwinds, the resulting commodity rally may stabilise mining stocks and gold stocks should have a good day.

Last night’s market action also created parallel situations for the US Fed and OPEC. Persistent US Dollar weakness provides a reason for the Fed to continue lifting interest rates. The stimulatory impact of a weaker currency in tandem with pro cyclical stimulus from recent tax cuts should allow the Fed to continue the early stages of policy normalisation without harming growth.

In a similar vein, ongoing strength in the oil price and an improving inventory situation may bring forward the time when OPEC plans to taper its production ceiling.

Small declines in US indices overnight represent an ambiguous pause in the current strong up trend. It is unlikely that local markets will take too negative a lead from this pause given that the materials and financial sectors had positive sessions on US markets. However, the long weekend will provide short-term traders with a reason to for caution. Given the recent pick up in volatility, traders may prefer to reduce exposures given that there will be two international trading sessions before the local market re-opens.

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