Trump and Brexit fuel a huge day for currency trading
We’re coming off what has been a huge day for trading in currency markets dominated by big moves for the US Dollar and British Pound that sent shockwaves through other pairs igniting rallies in gold, JPY, AUD, NZD, CAD, SGD and other currencies. US traders returned from their long weekend to find markets in turmoil as political uncertainty roared back with a vengeance and the trends of late 2016 started to collapse like a house of cards.
The late 2016 rally in US stocks and USD had been built on hopes that incoming President Trump would usher in a new golden age of growth with no opposition. This dream has smashed into the wall of reality with opposition and unintended consequences emerging and upsetting the apple cart. Markets which had priced Trump to perfection now find themselves standing on quicksand. Meanwhile with political uncertainty increasing worldwide, defensive markets that had been really hammered, particularly gold and JPY are roaring back to life.
The US Dollar in particular saw support totally smashed and broke to the downside after President-Elect Trump indicated he thinks the dollar is too high which he blamed on China keeping its currency too low. Traders have taken this to suggest that he has figured out the higher Dollar could crimp his economic plans and because of this, Trump may not be as open to multiple rate hikes and an elevated dollar through the year.
Adding to the change in sentiment was mixed comments from the Fed. Governor Lael Brainard warned that increased fiscal stimulus could lead to more offsetting rate hikes. Meanwhile, NY Fed President Dudley indicated he doesn't see the Fed becoming aggressively hawkish this year. Overall, it still looks like the USD has priced in more rate hikes this year (4-5) than what we are likely to get (2-3) and that
The biggest move today has been the explosive 2.6% rally in GBP against USD and 1.8% against EUR around UK PM May's big Brexit speech. The street has applauded her comments indicating that following a full Brexit. She intends for Britain to become a strong, outward looking, great trading nation, a magnet for international innovators that also provides a fair deal for everyone at home. PM May indicated plans to work toward some kind of customs union trade deal with the EU with a phased transition but no membership, enabling Britain to control its immigration and laws. She also indicated no deal would be better than a bad deal and won’t work with those who want to punish Britain for standing up for itself. She also promised a vote in Parliament on the final Brexit deal.
There isn’t much Asia Pacific news today but we could see a focus on China between President Xi speaking at Davos (a forum that is also looking past its prime) today, and The China GDP report due later in the week. Mr. Xi indicated Chain's economy continues to struggle but government support is apparently helping. He also promised not to devalue China's currency, blamed the financial crisis on bad regulation rather than globalisation and promoted global trade. This sounds like the country which has benefitted the most in the last 20 years scrambling to maintain its gains in a changing world.
China may have other problems too that could attract attention from traders with reports suggesting the country’s oil production is declining with new discoveries no longer keeping pace with declines at tiring older fields.
Sterling is likely to remain active through tomorrow’s UK employment numbers with traders looking for more evidence that the UK economy has strengthened heading into Brexit negotiations. CAD may also be active around the Bank of Canada’s latest interest rate decision. The Canadian economy has been strengthening lately so the central bank is likely to remain on hold but traders may look to the statement for commentary on the outlook for Canada in light of changing political, fiscal and monetary trends stateside.
There have been no major announcements after the US close today
Significant announcements released overnight include:
US Empire manufacturing 6.5 vs street 8.5
UK consumer prices 1.6% vs street 1.4% vs previous 1.2%
UK core CPI 1.6% vs street 1.4%
UK retail prices 2.5% vs street 2.3%
UK producer input prices 15.8% vs street 15.5%
UK producer output prices 2.7% vs street 2.9%
UK house prices 6.7% vs street 6.1%
Germany ZEW current 77.3 vs street 65.0
Germany ZEW expectations 16.6 vs street 18.8
Upcoming significant economic announcements include:
(Note: 11:30 am in Sydney/Melbourne is currently 1:30 pm in Auckland, 4:30 pm in Vancouver, 7:30 pm in Toronto/Montréal, 12:30 am in London and 8:30 am in Singapore)
6:00 pm EST FOMC Williams speaking
7:00 am GMT Germany consumer prices street 1.7%
9:30 am GMT UK jobless claims change street 5K
9:30 am GMT UK 3M employment change street (35K)
9:30 am GMT UK unemployment rate street 4.8%
9:30 am GMT UK average weekly earnings street 2.6%
10:00 am GMT Eurozone construction output previous 2.2%
10:00 am GMT Eurozone consumer prices street 1.1%
10:00 am GMT Eurozone core CPI street 0.9%
8:30 am EST US consumer prices street 2.1%
8:30 am EST US core CPI street 2.1%
9:00 am EST FOMC Kaplan speaking
11:00 am EST FOMC Kashkari speaking
3:00 pm EST FOMC Yellen speaking
9:15 am EST US industrial production street 0.6% vs previous (0.4%)
10:00 am EST Bank of Canada decision 0.50% no change expected
10:00 am EST Bank of Canada monetary policy report
11:15 am EST Bank of Canada Poloz and Wilkins press conference