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From the Floor: Dollar wobbles on Mnuchin remarks — #SaxoStrats

  • USD slips on Mnuchin remarks that Trump impact likely to be limited in 2017 
  • GBP breaks above short-term range on dollar softness 
  • Treasuries broke higher with move in USD; 10-year yield approaches year low 
  • Rally in bunds continues, though political uncertainty seems to be fading: Boye 
  • Precious metals extend rally – not least silver: Hansen 
  • Copper price broke below $2.70/lb 
  • Record long in the commodity market; 'So something’s got to give': Hansen
By John Acher

The US dollar fell and other majors gained after US treasury secretary Steven Mnuchin indicated that the impact of Trump administration policy steps could be limited this year, against market hopes for a swift rollout and effect.

Mnuchin also said he wanted to see tax reform passed before Congress' August recess, whereas financial markets had hoped policy changes would be enacted fairly quickly, Reuters reported.

The drop in the USD also followed Wednesday’s minutes of the Fed’s most recent policy meeting, which showed that voting members of the Federal Open Market Committee do not seem to be in any big hurry to raise interest rates, which had also weighed on the dollar this week.

“This makes investors back down a bit from pricing in [interest rate hikes] too early, so that is the major reason that gold was bid up to near the $1,250/oz level,” says Hong Wei Lee at Saxo Bank’s Singapore hub.

Saxo Bank’s forex strategy chief John J Hardy says that Mnuchin’s remarks disappointed financial markets’ hopes for US president Donald Trump’s speech to Congress on Tuesday next week.

“Yesterday, we saw sterling gaining and breaking above a short-term range,” says Hardy. ”It has been very tight.”

There was no GBP-specific news to warrant sterling’s strong gains, but rather it reflected the weakness in the dollar, Hardy says.

Sterling gains as GBPUSD local resistance falls
Source: Saxo Bank 

”Especially Mnuchin’s discussion of the border adjustment tax – considered one of the most potentially dollar-positive moves – says they are looking at it, but expressed a considerable dose of scepticism there,” Hardy says.

That, Hardy says, was apparently a disappointment to the markets, in addition to Mnuchin’s remarks that the administration hopes to get something done by the August recess, but suggesting that that could be an aggressive schedule.

“A devil’s advocate could say ‘look, underdeliver on expectations, and then overdeliver on reality,’ but we’re all adrift here on what actually can be delivered and how this will affect market expectations, and especially the US treasury market and the US dollar,” Hardy says.

Markets remain confused about Trump’s recent broadside about China being a “grand champion” of currency manipulation, while Mnuchin has said he has had some great talks with China and has said nothing pointed on the currency, Hardy says. 

“The market is generally seeing this as all dollar-negative,” he says.

The Australian dollar remains vulnerable to the drop in iron ore and other commodity prices though RBA governor Philip Lowe’s efforts overnight to signal that the cutting cycle has reached its end had the opposite effect on the AUD, Hardy says. “That tension is making it hard to get a read on aussie,” Hardy says.

AUDUSD - RBA'S Lowe talks down rate cut prospects, says AUD should fall if US rates rise
Source: Saxo Bank

Precious metals rally
“We see precious metals continue the good run that they have had so far this year – not least silver, it is on track for its ninth consecutive weekly gain,” says Saxo Bank's commodities strategy chief Ole Hansen, adding that silver is now targeting $18.38/oz, up from around $18.24/oz.

Gold took out the $1,245/oz level, and that is supporting a move to its next resistance at $1,278, Hansen says.

“It’s comments from Mnuchin yesterday about the dollar and low borrowing costs, and that’s removed some of the speculation about rate hikes in March,” Hansen says.

Gold targets $1,278/oz with $1,144 now being support
Gold prices
Source: Bloomberg/Saxo Bank

Bonds also rose on Thursday, with the 10-year treasury yield approaching a year low at 2.32%. "We could see a test of that level.," says Saxo Bank fixed-income trader Michael Boye.

"The rally in Bunds continues to march higher," Boye says, adding that large coupons and redemptions were being reinvested, but otherwise it was hard to see what has caused the rally there.

"Even the political uncertainty seems to be fading, so I would expect some kind of a reversal here," Boye says.

Mixed signals for oil

Thursday’s figures from the US Energy Information Association gave something to cheer about to oil market bears as well as to bulls, Hansen says. “As you know, I probably belong to the latter category for now.” 

US crude oil inventories rose by less than expected, but when imports fall while exports rise to the highest since 1993, and inventories still are up, that shows that it is a slow process to get US inventories down, Hansen says. 

“Rising exports from the US into the global market are going to prolong the overall rebalancing process, so that’s something we need to keep an eye on,” Hansen says. 

“Where does that leave us in the short term? We’re still stuck in the range, but having tried now the upside a couple of times, I think there is risk we need to test lower,” Hansen says, noting a first key level of support of $52.70/barrel for WTI. “That’s a level I will be aiming for at this stage, but you can make both bullish and bearish conclusions from yesterday’s [EIA] report.” 

Copper prices broke down below $2.70/lb on Thursday, but were finding a bit of support on Friday, after recent gains on still unresolved supply disruptions in Indonesia and Chile. A solution to those disruptions could see copper move “considerably lower”, Hansen says.

US treasury secretary Steven Mnuchin's comments have left the markets pessimistic ahead of Trump's speech next Tuesday. Photo: Wikipedia/public domain

John Acher is a consulting editor at TradingFloor


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