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Kay Van-Petersen
Saxo's global macro strategist Kay Van-Petersen examines the big issues for the markets in the week ahead in this brief rundown.
Article / 20 January 2017 at 9:01 GMT

FX Update: Market stumbles towards Trump inauguration – #SaxoStrats

Head of FX Strategy / Saxo Bank
Denmark
  • Market ignores Draghi's dovishness and focusses on Trump
  • Anxious market will study where Trump places the emphasis
  • Currency traders particularly nervous USD references in speech
Trump inauguration
 The Trump inauguration is the only show in town today. And the only one the market cares about. Images: iStock

By John J Hardy

The European Central Bank president Mario Draghi ticked all of the dovish boxes at yesterday's ECB press conference, saying that the bank saw no convincing upwards trend in underlying inflation and declaring a willingness to "look through" a recent spike in some headline inflation numbers, attributing these to a rise in oil prices. 

He also insisted in the statement and in the press conference that the ECB maintains the ability and willingness to expand its purchase programme if necessary. The risks for the economic outlook, while some improvement was noted, were seen as tilted to the downside. In addition, Draghi noted the political uncertainty that lies ahead in 2017 as grounds for extending the ECB's accommodative policy. 

The euro made a valiant effort to sell off in line with the fundamental signal this provided, though it is apparent that the meeting was already priced into the mix or that today's US focus is simply too dominant to divide the market's attention. If we look at EURJPY's strong rally over the last couple of days, it suggests that the market is "looking through" Draghi's dovishness and still believes in an eventual need to signal a taper of purchases later this year.

Yellen's comments overnight were didn't generate the attention of the previous night's somewhat hawkish mix as the USD hardly failed to take note as the Trump's inauguration today is the sole focus of the market's attention. While she did declare an intent to hike rates gradually, she somewhat surprisingly declared that the labour market slack has disappeared – reversing comments from a mere few months ago. 

On to Trump's inauguration speech today: the market will be poring over the emphasis in his inauguration on his well known mix of policy measures. Currency traders are particularly nervous whether any prominent mention will be made again about the US dollar in broad terms, as the mention earlier this week of the USD being too strong has helped put a lid on the US dollar this week. Trump's rhetoric on the USD is at odds with specific policy moves that would be highly USD supportive – so what wins – the rhetoric or the policies? This is likely a question that will take months if not years to answer.
 
Chart: USDJPY

Outside of USDJPY, the US dollar has mostly traded on the weak side this week. The last couple of sessions have shown us that the yen is far more attuned to the interest rate outlook than any other currency, which is likely to remain the case as long as the Bank of Japan is seen as continuing to control yields. The USDJPY bulls got a boost with the move back above the sub-114.00 pivot area, but a look around at other pairs suggest that this is mostly a weak JPY story and we'll need to see a full pull above the 116.35 pivot area for a sense that we're gearing up for a charge on 120.00+. Do note that the Ichimoku cloud level has risen close to 114 today and could be important for the outlook on the closing levels for the day.
usdjpy
Source: SaxoTraderGO

The G-10 rundown

USD – the quite strong US data yesterday (another near-record low in jobless claims, solid bounceback in housing starts and the highest Philly Fed manufacturing survey ) was overlooked as investors look for signals from today's Trump inauguration speech. Any Trump mention of a general belief that the USD needs to weaken could touch off a broad capitulation, though there is also the risk of a sell the rumour, buy the fact reaction as Trump unlikely to get specific in this speech, which could be more of a broad-brush ideological one aimed at defining the intended spirit of his administration.

EUR – The dovish ECB unable to trigger a weaker euro as the focus is clearly on risks that Trump talks down the US dollar. The critical level for EURUSD remains the 1.0800/50 area, below which we remain bearish, and above which we have to make a major overhaul of our outlook.

JPY – keeping an eye on the bond market more than any other coincident indicator here. Given the widespread USD weakness, bulls may want to sit on their hands until after Trump's speech or until early next week.

GBP – the key pivot zone at 0.8600/50 still hanging in there for EURGBP, while the GBPUSD strength is more about USD weakness today – did the May speech really clear anything up? No.

CHF - euro strength showing up very weakly here as EURCHF lifts slightly away from 1.0700 area support and likely Swiss National Bank intervention area. USDCHF parity level will be a big focus over the next few sessions as we still prefer that one higher as long as we can avoid a dip through the 0.9950 level or so.

AUD - Aussie is ramping higher as we look towards next week's quarterly CPI release and wonder how much the Reserve Bank of Australia is enjoying the currency strength. If we're able to steer clear of 0.7500 in AUDUSD, the way is open to the 0.7800+ highs of 2016, with the next couple of sessions pivotal for the outlook. 

CAD – CAD was trying to play the reflation theme last week and early this week, but the protectionism concerns raised at this week's dovish Bank of Canada meeting and reminder of Trump's declared intent to renegotiate NAFTA have spooked CAD longs, with USDCAD back mid-range. The chart is an ugly, choppy mess, but the 1.3000-1.3100 zone looks like strong support. It may take some time to build an argument for a significant break higher. Concerns on protectionism aside, it's hard to imagine that AUDCAD and NZDCAD can maintain their recent strength and we'll look for opportunities to fade these rallies if the technicals shape up to do so.

NZD – the Aussie and the kiwi are the market's darlings at the moment. That is likely to reverse in a big way if Soros' rather dim views on everything from US policy to China's prospects prove correct. We're highly sceptical of further upside potential, but have to wait for the technicals to shape up for fading this move.

SEK and NOK - the ECB meeting not able to shake the Scandies notably as we await further news here. That SEK was unable to pull stronger versus the euro after the dovish ECB was a bit disappointing, but traders may simply be pressing the pause button across asset markets until we get to the other side of Trump's speech today.

Upcoming Economic Calendar Highlights (all times GMT)
  • 0930 - UK Dec. Retail Sales
  • 1330 - Canada Dec. CPI
  • 1800 - US President Trump's inaugural address

– Edited by Clare MacCarthy

 

John J Hardy is head of FX strategy at Saxo Bank

1y
Juhani Huopainen Juhani Huopainen
This feels familiar - Trump's policies would be USD-positive, but the strength of the USD would be counterproductive to those policy goals. So USD-negative rhetoric is used.
21 May
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