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FX Update : Trump continues to make headlines

Written by Howard Wilcox on January 31st, 2017.      0 comments

Most of the news over the weekend has centred around President Trump’s executive order barring immigrants from 7 Muslim countries entering the US and its effects. Although this has rattled nerves, this week will see markets focus first on the FOMC meeting on Wednesday then the Non-farm payrolls on Friday which should give an indication that the US economy continues to recover at good rate. US GDP data for Q4 was weaker than expected which saw the USD marginally softer, giving investors little reason to continue to add to reflation trades that have set the tone on markets since Donald Trump’s election. US equities were little changed near all-time highs amid some solid corporate earnings. The meeting between Prime Minister Theresa May and President Trump ended without any major tangible result (but this probably always going to be the case given it came only a week after Trump’s inauguration) there was a board statement that they would work to establish trade agreements and continue to cooperate on defence, with May adding that President Trump was “100% behind NATO”....time will tell..! Asian markets will be fairly subdued over the next few days as China and several other Asian nations celebrate the Chinese New Year holiday…..welcome to the year of the Rooster…!

The threat of a downgrade to Australia’s AAA credit rating is closer, as news was released that the federal government will be forced to lift its own self-imposed credit limit in the coming months as debt levels spiral towards half-a-trillion dollars. That’s almost double the number the Coalition inherited from Labour. The gross debt level is now $474 bio up from $274 bio in September 2013 when the Coalition under Tony Abbot was elected. This debt level is now only $26 bio short of the $500 bio debt ceiling set by former treasurer Joe Hockey three years ago and expectations are now for this ceiling to be breached by June, possibly sooner. Expect more weakness ahead for the Australian dollar

New Zealand
Figures for immigration and tourist numbers out today show a record number of tourists and immigrants came to New Zealand in 2016 with more migrants coming in on work visas and more holidaymakers than ever before, and expectations are for migrant inflows to keep increasing. Annual net migration hit 70,600 in December 2016, with the biggest net migrant gains from China, India, the UK and the Philippines. Migrant arrivals rose 4 % to 127,300 in the year, also a new record, while migrant departures dipped 0.5 % to 56,700. This data continues to reinforce the success story of the New Zealand economy and with the continuing solid dairy price performance, underpins the New Zealand dollar and makes it more likely that an uptick in inflation later in the year will see interest rates start to trend higher.

United States
With most of the news from the US centring around the immigrant ban, US stocks have dropped sharply with the Dow falling back below the 20,000 level. The concern is that Trump’s order on immigration has raised speculation that he may follow through with further isolationist policies espoused on the campaign trail, overshadowing a pro-growth agenda that kicked off the equity rally. With a more risk averse tone evident, gold and the JPY were higher and the US dollar lower as investors showed more favour for safe haven assets. Although most of the news centred around the immigrant ban, this week economic attention will switch to the FOMC meeting on Wednesday, which will be closely monitored for any hints of timing for rate rises and the results of the first Non-farm payroll for the new year due on Friday. Also of note this week are continued corporate earnings results from heavyweights Apple, Facebook and Amazon, of the S&P 500 companies to report so far 73% have beaten earnings estimates.

United Kingdom
Although PM May’s visit to the US was short on detail, the signs were that it augured well for a potential UK-US trade deal once the UK is released from its EU obligations in around 2 years. Later this week the Bank of England is expected to upgrade its growth forecasts for the second time in three months. The economy continues to rises above expectations of a post-Brexit vote slowdown. Some market analysts are expecting the BoE forecast to rise to 1.7% up from 1.4% in November and substantially higher than the  0.8% in August.
On Thursday the Bank’s Monetary Policy Committee is expected to leave its growth forecast for 2018 at 1.5%, with 1.6% for 2019. Economists expect inflation to lift well above 2% this year, as the fall in the pound’s value pushes up import prices and consumer costs.

The era of low interest rates for the EU may be close to an end as borrowing costs in the Eurozone region jumped to multi-month highs. Data confirmed inflation in Germany reached a 3 1/2-year high in January, closer to the European Central Bank's target and increasing  talk about the timing of unwinding its monetary stimulus. French government bond yields hit a 16 month high on additional upward pressure from uncertainty surrounding the upcoming presidential elections, a key political risk event for Europe. Also of note , were some alternative comments from an ex-ECB board member who said that the Eurozone should break up if its members were to thrive again. Jurgen Stark, also a former vice-president of Germany’s Bundesbank, commented that there needed to be a two-speed Eurozone, with France and Germany at the core which would help to ensure the smaller secondary bloc’s survival. He suggested Belgium, France, Luxembourg, the Netherlands and Germany, plus Austria and Finland would form one bloc of the system, with staggered integration for other countries such as Italy and Greece. His comments mirrored concerns earlier voiced during the GFC whether it was still appropriate to keep countries together with different economic structures and different economic performance

The Bank of Japan met today and as widely expected they left monetary policy unchanged. The bank said uncertainty around US monetary policy, China and Brexit pose potential downside risks. Although retail sales data was softer than expected this was largely ignored by the market. The BoJ has increased the pace of longer-term JGB bond purchases over the last week which has put pressure on the JPY and BoJ policymakers will be hoping that any Trump inspired USD rally continues to weaken the JPY. Due this week are earnings reports from industrial heavy weights, Honda Motor Co and Sony Corp.

The Canadian dollar recovered marginally at the end of last week as concerns abated over any changes to NAFTA that may occur under President Trump. There is a speech by the Canadian Central bank head, Stephen Polz later tonight where he is widely expected to try and talk the CAD lower. Tonight will also bring GDP data for Q4 but these results may well be overshadowed by the US Fed statement later tomorrow.

Major Announcements
•    Australian inflation data 0.5% vs 0.7% expected
•    German IFO Business Climate 109.8 vs 111.3 expected
•    New Zealand inflation data 0.4% vs 0.3% expected
•    UK GDP 0.6% vs 0.5% expected
•    USD GDP 1.9% vs 2.1% expected
•    US Core Durable Goods Orders 0.5% as expected
•    Bank of Japan leaves rates unchanged