- Trump controversies spark broader market panic
- USDJPY makes stunning 2.3%-plus correction
- Dollar/yen decline 'was steep and ugly'
Donald Trump's presidency has never been stable, but the market is taking his latest woes more seriously than their predecessors. Photo: Shutterstock
By John J Hardy
The market had for some time tried to compartmentalise Trump’s missteps in Washington, limiting the fallout to the US dollar and perhaps expectations for the Federal Reserve, but the accumulated chaos has finally now led to a broader meltdown in risk appetite as we all have to wonder whether this can lead to a longer-term political and even constitutional crisis.
If so, we can forget about the Trump trade in the months to come. After all, if we roll back our perspective to the massive shift in expectations in the wake of the November US presidential election, the Trump trade is far from fully priced out of this market.
The volatility in key FX pairs was remarkable yesterday, with a mere, approximately 10 basis point drop in US 10-year yields and 2% selloff (-ish) in the S&P 500 leading to a top-to-bottom 2.3%-plus correction in USDJPY.
Elsewhere, we can see that the USD weakness and JPY strength were relatively isolated, and, for example, USD/risk pairs saw little movement with only the riskiest of emerging market currencies faltering a bit during the worst of the deleveraging. We would expect EM vulnerability to escalate on any continuation of this very ugly environment.
Elsewhere, it is less about the news and more about the ad hoc US political headlines and raw maket sentiment now that a good dose of volatility – the largest in months – has been set in motion. One item that saw at least a temporary calm was Republican Senator McCain, a noted Trump non-fan, talking down impeachment of the President even as a Democratic Representative from Texas asked that Congress consider impeachment on obstruction of justice.
It is far too early to talk impeachment, but it is in the air and will get more serious on the next Trump misstep. Important to note that impeachment requires a majority vote in the House and removal of the president requires a two-thirds majority vote in the Senate. Trump has a tall task in rebooting his presidency and is a 70-year old billionaire capable of behaviour change?
The USDJPY decline was steep and ugly, in line with the broad risk deleveraging, and the pair sliced through the Ichimoku cloud in one brutal move, only finding support as the 61.8% Fibo neared. This, and perhaps, the 110 psychological level are the last supports ahead of the previous lows for the cycle.
It will take a sharp and immediate rejection of yesterday’s ugly selloff for bulls to revive their hopes in the coming sessions, and the tactical resistance is proving to be the Ichimoku daily cloud in today’s early action.
The G-10 rundown
USD – a massive reshuffle of Trump’s political team and signs of behaviour change (Twitter account gone quiet?) may be required for the USD to have a chance at a larger recovery any time soon. The market is suddenly downgrading June FOMC rate hike odds to slightly better than even after previously considering them a near-sure thing.
EUR – must be a record number of ECB speakers out speaking today – Draghi at 1700 the most important of these, and we also have the ECB minutes out earlier in the day. The euro path higher less interesting in an environment of risk-off as the yen takes charge.
JPY – sweeping stronger across the board as yen shorts on all of the prior complacency are squared in the face of deleveraging. The yen will be the high beta currency across the board whether the mood worsens or improves.
GBP – sterling showed signs of a rally attempt yesterday after the strong payrolls for March, but risk deleveraging and the stronger euro are impediments here. EURGBP around 0.8600 looks pivotal as we pointed out yesterday as we await UK Apr. Retail Sales data today.
CHF – the Swiss franc pushing higher on the risk-off theme and USDCHF now pushing into new multi-month lows.
AUD – strong headline numbers on the Aussie jobs report overnight, but this is a volatile survey and some of the internals were less encouraging, like hours worked. And in an environment of risk off, AUD not likely to outperform, though it has managed to maintain relative strength versus the flailing USD near the key 0.7450-0.7500 pivot zone in AUDUSD.
CAD- USDCAD manages to stay supported for now as recent oil rally and risk-off are contradictory forces on the pair. The week closes with important data from Canada on Friday – CPI and Retail Sales.
NZD – remaining thoroughly anonymous for now, but recent breakdown attempts in NZDUSD so far rejected while AUDNZD mulls whether it wants to follow through on its recent strong comeback.
SEK – EURSEK bulling into last resistance range ahead of 10.00 as market gives low-yield, thinly traded currencies a wide berth in a deleveraging environment.
NOK – EURNOK still appears supported as the smaller currencies have a hard time mustering a rally in a deleveraging environment. 9.35-9.25 the downside pivot zone.
Upcoming Economic Calendar (all times GMT)
- 0830 – UK Apr. Retail Sales
- 1130 – ECB Meeting Minutes
- 1230 – US Weekly Initial Jobless Claims
- 1230 – US May Philadelphia Fed Survey
- 1245 – ECB’s Nowotny/Lautenschlaeger to Speak
- 1700 – ECB’s Draghi to speak
— Edited by Michael McKenna