Markets Today: Alive and kicking

Last week the USD regained its mojo largely thanks to President Trump’s hint of a phenomenal tax policy announcement and on Friday the USD waivered, particularly against JPY when at a joint press conference with Japan’s PM Abe, President Trump responded to a question about currency devaluation saying that “we will all eventually…be at a level playing field.” and then added “That’s the only way you can fairly compete in trade”.

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The dollar fell immediately after the comments but quickly recovered, suggesting that, at least for now, the prospect of tax policy changes is the dominant driver for the USD.

So although the joint Trump-Abe conference didn’t offer much new in terms of policy or fireworks, it did strike a friendly and constructive note between the two countries. This follows early news on Friday that president Trump told Chinese President Xi that he will respect the “One China” policy, both actions suggest an easing in tension between the White House and Asia. Notably too, after North Korea launched a test missile in the weekend, Trump was alongside Abe and said that “…the USA stands behind Japan, its great ally, 100%”.   These are still early days of course, but recent events suggest that not only Trump policies will take longer to implement, they are also potentially likely to be a lighter version of the pre-election rhetoric. For now, the Trump reflation trade remains alive and kicking and on the positive side an all-out trade war looks less likely, however there are increasing doubts over the pro-growth policies too. Trump has set the stage for a phenomenal tax announcement, now he needs to deliver.

After being up nearly 0.4% on the day, DXY ended the week 0.15% with softer than expected consumer sentiment data (U of Michigan Consumer Sentiment index fell to 95.7 in Feb from 98.prev.) and Trump’s remarks later in the day weighing on the USD index. The AUD is still benefiting from the RBA’s optimistic outlook on the economy and a solid rise in iron ore (+5.39% on the week). The currency was the best G10 performer on Friday, up 0.64% on the day and 1.58% month to date. CAD was the other G10 outperformer, (+0.47%) boosted by a better than expected January employment report (+48k vs -10k exp.). In what has been a volatile week, JPY ended Friday unchanged at ¥113.2 and the EUR leaked another 0.11% with Scandinavian currencies down between 0.13% and 0.32%.

On Friday, US equities continued to climb amid expectations of tax cuts and fiscal spending from the Trump administration (S&P + 0.36%,DJ +0.48% and the NASDAQ was 0.33%). Financial shares were also boosted by news that Fed Tarullo, the sector top regulator, announced his resignation. Tarullo’s departure means Trump will soon get to fill three of the Fed’s seven board positions (currently there are two existing vacancies), giving him the the opportunity to significantly shape the Fed thinking ahead.

UST yields were little changed on Friday (10y closed the week at 2.4073%) and in commodities, gold closed at $1234.4( -0.06%) ,oil had a good night (WTI +1.62%, Brent 1.92%) and iron ore closed the week at $86.62, up 3.32% on the day and 5.39% on the week. Copper also had a god day, +4.69% as BHP signals the strike in Escondida mine in Chile may last a long time.

Core logic weekend market update reported a solid week of auctions across capital cities. Melbourne auctions clearance rate was 75.4% compared to 77.7% in the previous week (which had low volumes). Sydney’s had preliminary clearance rate of 84.8%, up from 72.3% previously and higher than last year’s 78.1% rate.

CFTC data from the week ending February 7 shows USD speculative longs against G10 currencies were paired by 16.4k to 152k. Speculators reduced net JPY short
positions by 3.4k to -55k. Longs in CAD and AUD rose by 5k and 4k respectively to 8.5k and 16.7k and GBP shorts were extended by 2.7k to -64.5k. Meanwhile in rates, 5y and 10y UST shorts were reduced by 34k and 49k respectively, and longs in 2y were reduced by 18k to 13k.

Coming Up

Yellen double testimony, NAB Business survey and Australia’s labour force report are the main highlights for the week. The AUD closed the week essentially unchanged, but with solid momentum following the positive outlook on the economy by the RBA (Statement, Lowe speech and SoMP) and solid iron ore gains. That said, the AUD is still unable to make a break above the 77c mark, a solid labour force report on Thursday could be the domestic catalyst, but much will depend on the USD as well.  Fed Chari Yellen’s double Testimony and any policy tweet/update from Trump are the ones to watch.

Japan Q4 GDP is the main data release for the day (1.1% annualised SA qoq  exp. vs 1.3% prev) and then focus is likely to shift towards Europe with question marks on Greece ability to reach a deal with its lenders.

Overnight

On global stock markets, the S&P 500 was +0.36%. Bond markets saw US 10-years +1.25bp to 2.41%. In commodities, Brent crude oil +1.92% to $56.7, gold-0.1% to $1,234, iron ore +3.3% to $86.62, steam coal +0.4% to $80.05, met.coal +0.0% to $164.00. AUD is at 0.7684 and the range since Friday 5pm Sydney time is 0.7619 to 0.7689.

Good luck.

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