FX: Every Which Way But Down

There has been a huge shift in momentum for the USD overnight, as the market pivots back to Trump protectionism; Trump tax and fiscal spending updates. So much for the Trump trade being dead and buried, as US 10-year yields moved to 2.34%. Equity markets were euphoric, with the NASDAQ breaking 6000 for the first time while gold slipped to 1260, as French election risk and North Korea tensions abated.

What initially started off as a post-French election relief rally has turned into a full-out global equity rally. Despite higher US yields, equity investors were ecstatic about the current market narratives, and Wall Street had a stellar day on the prospect of tax cuts being announced on Wednesday, strong corporate earnings and ongoing relief from the French election results.

On the perpetual market rumor mill, there was an ECB leak that implied no changes this Thursday but a possible adjustment in language at the June meeting. A Reuters story citing “sources” claimed that the ECB would send a signal in June towards a reduction in monetary stimulus. The decline in political risk in France was seen as supporting such a move.

The Tump protectionism play saw a stronger dollar against high yielders and commodity currencies as markets re-visit the US protectionism theme. Traders are viewing comments from US Commerce Secretary Wilbur Ross that stated a 20% tariff on Canadian softwood lumber imports is likely as a litmus test for Trump protectionism and dealers were quick to sell off currencies with a significant portion of exports derived from the primary industry.

After cutting my chops on Bay Street (Toronto Canada), I can assure you the softwood lumber dispute is nothing new and has been making headwinds in one form or another since 1982. While the tariff is not economically damaging for Canada, the unnerving over reaction on the Canadian dollar is likely due to the broader NAFTA and political considerations this move may have.

Commodity currencies have come under pressure overnight, probably led by the move higher in USDCAD as the US protectionism theme rears its ugly head. However, the AUD has outperformed the CAD overnight, post-Trump Canadian softwood tax. While risk sentiment is soaring, and with iron ore off its lows, we should expect the Aussie to hold above the .7500 level. However, with today’s CPI the key local major event, dealers are anxiously awaiting the news as it could have far-reaching RBA policy implications.

USDJPY was one of the best performers overnight, rallying from low 110s to a high of 111.20. With buoyant risk appetite and higher 10-year US yields, trader intrepidity is leading the charge. The play is all about the anticipated Trump tax reform as traders continue to clamor for upside exposure.

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A huge uptick in two-way volumes overnight. EURUSD continued to be the main attraction as buying accelerated after the Reuters article suggested the ECB could reduce monetary stimulus in June. Removing the easing bias would be supportive of the euro and even more so as investment flow seeks out relatively cheap European assets and election hedges should continue to unwind.

Written By: MarketPulse