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FX Update: Trump and Yellen the focus this week

Written by Howard Wilcox on February 28th, 2017.      0 comments

Markets continue to lack direction with choppy trading for both equities and currencies albeit US equities continue to trade at elevated levels. This week will see new US president Trump speak before the US Congress, comments from Fed Chair Yellen on the economic outlook and continuing rumblings on the Eurozone political front, especially around the French elections that has the ability to create volatility. When President Trump addresses Congress on Tuesday night the market will be looking for more detail on his fiscal stimulus, especially around his spending plans and tax cuts to give the current “reflation” equity rally further “legs”. Overnight he has outlined large increases in defence spending and ear-marked infrastructure to attract increased funding. Likewise Fed Chair Yellen's speech on Friday will be combed for further clues as to the likelihood of a rate increase at the next Fed meeting on March 15th. The market now rates close to a 50% chance of a March increase up from 34% two weeks ago. The EUR and Eurozone equity markets should remain volatile as the French election approaches and the polling figures continue to show increasing support for the anti EU National Front party of Maine LePen. However her chances took a blow late last week as another French politician Francois Bayrou said he now won’t run in April’s presidential election, pledging support to fellow moderate candidate Marcron. This has seen a slight reduction in demand for safe-haven assets. We view political risk as the largest threat for the Euro over the next 3 months, even as economic data is starting to show “green shoots”.

Although the Australian dollar traded above 0.7700 for several days, it continues to struggle to extend gains and is now again back under this level at around 0.7685.  Current account data out today showed a sharp narrowing in the deficit to A$3.85 bio for the December quarter due mainly to the increase in value of commodity prices. This is largely in line with forecasts and down from a A$10.2 bio deficit in Q3 2016.  GDP is due tomorrow and is expected to show an increase of 0.7% for 2016 Q4, rebounding from the shock 0.5% contraction seem in Q3. Tomorrow also sees the release of Chinese PMIs which could easily impact the AUD.  With the Australian dollar still unable to sustain gains beyond the 0.7700 level, momentum is now looking negative, but the AUD needs to break below the 0.7660 level to confirm additional declines that could extend down to 07450, although we’re unlikely to see this type of move before Friday’s US results.

New Zealand
The New Zealand dollar continues to remain resilient even in the face of a firmer USD. Data releases continue to underpin the New Zealand dollar and yesterday’s strong immigration figures are a case in point. Business confidence figures for February out today showed a drop as the economy moved into “a mature stage of the economic expansion”. Also out today was January merchandise trade data which showed New Zealand’s trade balance deteriorated in January, with the monthly deficit widening to $285m. However, a significant contributor to the surprisingly large deficit was a jump higher in the volume of oil imports, which is likely to reverse next month. Excluding oil imports and exports, the monthly deficit was a more moderate $36m. There was little effect on New Zealand dollar levels from these releases. Currently the NZD is back around 0.7185 and given the events in the US this week we expect the NZD to mark time at current levels until Friday's US jobs figure and subsequent comments from Fed Chair Yellen.

United States
US equity markets continued to forge ahead overnight advancing again to create the longest run in almost 30 years. Markets were also encouraged by comments from the President that he would increase spending on infrastructure which saw the value of industrial stocks boosted. Trumps address later tonight before a joint session of Congress is expected to lay out plans for tax and health-care reform. It now appears details of the “phenomenal” tax package will not be clear until the costs of repealing “Obamacare” are better known. Friday will see the release of the important Non-farm-payroll data for February. This is expected to be solid and given the desire of the Fed to “get ahead of the curve” this should increase chances of a rate hike in two weeks at the March 15th Fed Reserve meeting. Fed Chair Yellen is giving a speech after the NFP figures which will be the last comment she makes heading into the lockdown period before the Fed meeting. We suspect that she may strike a more hawkish tone than expected. Given expectations are now evenly balanced for a rate hike we look for both US  equity markets and the USD  to remain firm over the next 2 weeks, but especially the USD.

United Kingdom
Sterling has traded lower over the last two days, seemingly knocked by two reports: (1) that Theresa May, UK Prime Minister, could trigger Article 50 as early as mid-March and (2) that Nicola Sturgeon, Scotland’s first minister, could potentially call another vote on Scottish independence in March and that the UK government is apparently preparing itself for that possibility.  We very much doubt another Scottish referendum will actually happen, and this has now had cold water poured over it by PM May, but the concerns will be there, which along with uncertainty about the timing and process of UK’s exit from the EU should keep the GBP under pressure for the time being. Consequently, with this uncertainty any potential gains for the GBP, even on the back of better economic data, short term should not be extended too far – most of the negativity on these issues has for all intent purposes been pretty much priced in so expect consolidation of the GBP around current levels until there is more clarity on the Brexit issues. This week will also see more data to help give a clearer picture of the economy, Wednesday will bring manufacturing PMI and lending data, Thursday construction PMI and on Friday key services sector PMI.

European news still centres around the ebb and flow of French politics and how the scenery may look for the EUR after the French election. Latest news has Japanese investors running scared by European political risk and looking to liquidate significant holdings of French debt if the situation deteriorates further. According to reports large Japanese life insurance and pension funds are owners of French treasury bonds bought aggressively when the ECB first undertook quantitative easing, now holding (according to BoJ figures) around 13% of the entire market. Reports suggest that they started trimming some of these holdings late last year, but if the political situation becomes volatile a full scale liquidation would create significant downside for the EUR. The EUR has firmed against the USD overnight and if Trumps message disappoints tonight, may strengthen further, but political issues will keep any large moves in check and the market will be wary of pushing the EUR too high against the USD ahead of the Fed speak on Friday.

With the popularity of risk-off trades faltering, the JPY has given ground to the USD and currently is sitting at the 112.55 level after the USD dropped to 111.90 overnight.  Further retracement could see the USD supported around the 111.60 level but given the events stateside this week it is unlikely that there will be significant USD weakness against the JPY. Industrial output data for Japan just released showed a decline in January (-0.8%) the first decline in 6 months. This unexpected weakness in industrial output indicates a potential risk to sustaining recent economic growth
However, although domestic consumption continues to show weakness in Japan, net exports added to growth in the second half of 2016, and shipments rose in January for a second straight month.

The Bank of Canada meets on Wednesday this week.  No change in policy is expected and economic forecasts should also remain unchanged. The slow recovery continues, with still plenty of slack in the economy.  Terms of trade have shown an improvement, with the chances of a trade disruption given the new US administration appears to have reduced, but non-energy exports have dropped (-4.1% in December). Canadian GDP figures will be released on Thursday a day after the BOC meeting.  The economy is expected to have grown 0.3% in December slightly lower than the 0.4% in November.  Growth appears to have accelerated to 2.0% on an annualized rate in Q4 after a 3.5% pace in Q3, which was the strongest in over 2 years.

Major Announcements
•    NZD Global Dairy Trade Price Index -3.2%
•    UK GDP second estimate 0.7% vs 0.6% expected
•    Canadian core retails sales -0.3% vs 0.8% expected
•    Australian Private Capital Expenditure -2.1% vs -0.4% expected
•    Canadian Inflation 0.9% vs 0.3% expected
•    US Core Durable Goods -0.2% vs 0.5% expected