Below trend growth to continue
Never underestimate the ability of markets to discount the same news twice. Or in the case of the US dollar, the ability to ignore a relevant piece of news one day only to react with alarm to it a day or two later.
So it is that on Monday, markets completely ignored comments by President-elect Trump in a Wall Street Journal interview published after Friday’s market close, in which he said “Our companies can’t compete with them (China) now because our currency is strong and it’s killing us”. A re-run of these comments yesterday afternoon Sydney time clearly contributed to dollar weakness.
To be fair, pressure on the US dollar also stemmed from comments in the same WSJ interview (but which didn’t appear in the original report on Friday) in which Trump says, “It’s too complicated….anytime I hear border adjustment, I don’t love it….Because usually it means we’re going to get adjusted into a bad deal. That’s what happens.”
Much has been written in recent days – including by ourselves – on the potential for a border tax to have a powerful positive impact on dollar. So in distancing himself from the notion, it makes some sense for the dollar to have fallen, even if Trump’s plans to impose punitive (import) taxes on firms that make stuff outside the United States with the intention of then selling into the U.S., is also potentially dollar positive.
Perhaps contributing a little to the overnight FX and rates markets moves, NY Fed president Bill Dudley gave a speech and his comments came across dovish, although that is not unusual. He noted that the economy was not growing much above its sustainable long-term potential, pressures on labour market resources have been increasing, but quite slowly, and that the recent strength of the USD would put downward pressure on inflation.
While we can expect what have now been dubbed ‘open mouth operations’ to be a major feature of the Trump administration – from the Twitter fingers of the President himself in particular – a more nuanced view of administration dollar policy was on show in Davos yesterday in comments from Anthony Scaramucci, named as the Director of the Office of Public Liaison and Intergovernmental affair. Scaramucci noted that while ‘we’re going to have to be careful about the rising currency’ because of the impact it can have domestically, he also noted that strong growth and a strong dollar can co-exist. This is still our preferred scenario for 2017.
For now, the upshot of the news flow since last Friday’s market close is that the US dollar is weaker alongside lower US Treasury bond yields and where 10s are some 7bps lower overnight. The British Pound is the standout winner, GBP/USD adding three cents and so more than reversing Monday’s slide.
There was nothing in UK PM May’s speech last night to clearly counter the message derived from the weekend press reports indicating the UK would forgo seeking continued membership of the single market and customs union in order to prioritise immigration in its Brexit negotiations. Market did though latch on to May’s stated commitment to put a settlement agreement back to parliament.
A market running very short GBP into the speech was given no fresh reason to hang on to positions.
AUD/USD overnight strength, to a new YTD high of 0.7565, is really just a reflection of latest USD slippage. GBP, JPY and NZD are all stronger than the AUD, the latter possibly aided by a 0.6% rise in the latest Global Dairy Trade auction.
Donald’s Trump’s views on this, that or the other continue to be the dominant driver of price action across asset classes, with no signs his Twitter fingers will be given any respite ahead of Friday’s Presidential inauguration.
There is plenty on the calendar today and tonight but none of the content is an obvious game changer.
Fed chair Janet Yellen is scheduled to take part in a discussion at the Commonwealth Club in San Francisco but not until 7:00am Sydney time tomorrow morning. Later Thursday she’ll be speaking at Stanford University on the economic and monetary policy outlook, which promises to be the bigger draw. SF Fed President John Williams should pop up on the wires from 10:00 EDT.
US data includes CPI and industrial production, both for December. CPI is expected to be above 2% on both the headline and core measures (2.1% and 2.2% respectively). While the Fed’s preferred core PCE measure still languish below 2%, CPI data such as this will support Janet Yellen’s view from last week that ‘Inflation is below our 2% goal but it’s pretty close’.
The Bank of Canada meets tonight but will almost certainly sit on its hands, particularly given the added uncertainty from the Trump factor. The UK has latest labour market data.
Locally, we get the January Westpac Consumer confidence index. This ended 2016 on a weak note.
On global stock markets, the S&P 500 was -0.44%. Bond markets saw US 10-years -7.29bp to 2.32%. In commodities, Brent crude oil -0.73% to $55.45, gold+1.6% to $1,216, iron ore -2.5% to $81.55, steaming coal -0.7% to $82.90, mett. coal was untraded, last at $190.00. AUD is at 0.7562 and the range since yesterday 5pm Sydney time is 0.7513 to 0.7564.
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