With less than 24 hours to go before Donald Trump becomes President of the United States, investors are dumping dollars ahead of the inauguration as they worry about the new President’s trade and currency policies. In the past week, we’ve heard from a senior Trump advisor, Trump himself and on Thursday, the Treasury Secretary nominee Steve Mnuchin. All of them seem to agree that the strong dollar is a problem but Mnuchin tried to downplay Trump’s USD comment by saying it was not meant to be long term because the dollar's long-term strength is important. However his view that currency manipulation is an important issue, combined with Trump’s direct attack on China’s weak currency, raises concerns that he’ll take a very different stance from his predecessors on hot-button issues. Some of our readers may have forgotten that back in October, before the election, Trump promised to direct his Treasury Secretary to “label China a currency manipulator” on the “first day of his term in office.” If he follows through with this campaign promise, USD/JPY will drop like a rock as China could retaliate by selling U.S. Treasuries. Mnuchin also said he’s open to more sanctions, which could spark a trade war. So even though the U.S. dollar traded sharply higher on the back of stronger data (housing starts, jobless claims and the Philadelphia Fed Index), the rally fizzled to almost nothing by the end of the NY session as nervous investors unwound their positions. Politics will overshadow economics Friday with the President-elect’s policies in center focus. According to Trump’s spokesman, there will be four or five executive actions taken on day one. If he focuses on fiscal stimulus, the dollar will rise; if he talks trade restrictions and penalties, we could see another rollercoaster ride with steep drops for the greenback.
Euro initially traded lower following the European Central Bank’s monetary policy announcement but ended the day in positive territory thanks to USD's reversal. As expected, the ECB left monetary policy unchanged and Mario Draghi made no mention that ECB is considering tapering. While he admitted that inflation increased recently and that favorable conditions persist, he also said the council needs to look through the rise in inflation because there is no convincing upward trend in underlying inflation. Although the central bank expects the economic expansion to firm, it also thinks that QE could be expanded if the outlook worsens, which they could as the “risks to the economic outlook remain on the downside.” If not for the greenback’s retreat, the euro should be trading much lower. However after multiple intraday tests of 1.0600, it is clear that the bulls do not want give up control.
Sterling, on the other hand, spent the entire day in positive territory versus the greenback. Prime Minister May spoke in Davos Thursday, saying she wants to see a bold and ambitious trade agreement between the EU and UK while also keeping financial-service jobs in London. Although these comments did not have a significant impact on the currency, traders were relieved that she did not emphasize a hard exit. Investors also look forward to U.K. retail sales report, which should be stronger given the rise in wages and uptick in shop prices.
The Australian and New Zealand dollars rebounded strongly versus the greenback while the Canadian dollar extended its losses. Wednesday night’s economic reports were mixed with rising Australian employment offset by a higher jobless rate. While this had to do with the increase in workforce participation, the overall uptick in jobs was modest compared to last month’s report. In New Zealand, on the other hand, consumer confidence rebounded strongly while consumer inflation expectations increased. Chinese GDP, inflation and retail-sales numbers were scheduled for release Thursday evening, and they will be the main drivers of AUD and NZD flows. As for USD/CAD, it broke through 1.33 Thursday as Wednesday’s dovish comments from Bank of Canada Governor Poloz continued to reverberate in the markets. There could have been even more losses in the Loonie had it not been for better-than-expected data. Canadian manufacturing sales rose 1.5% versus a 1.0% forecast. Canadian consumer prices and retail sales are scheduled for release on Friday, assuring another busy day for USD/CAD.