By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The U.S. dollar extended its losses on Thursday as investors continued to unwind their Trump trades. With just over a week until his inauguration, they hoped that Donald Trump would spend some time outlining the scope of his infrastructure plans. Unfortunately, the President-elect failed to do so Wednesday and the U.S. dollar dropped as a result. U.S. equities and Treasury yields also fell as investors across different asset markets expressed their unified disappointment. The selling on Wednesday carried through to Thursday but began to lose momentum during the New York trading session.
We believe it won’t be long before the dollar -- USD/JPY specifically -- find a bottom although we can’t rule out a final flush preceding the base. If we take a step back, the positive outlook for the U.S. economy has not changed since November. American companies are adding jobs, paying more wages and optimism is on the rise. Yes, there are concerns about Trump’s conflict of interests, his alleged relationship with Russia and other issues, but they don’t compromise his plans for tax cuts and big spending. While we are still waiting for Trump’s policy details, there is no reason to believe that he won’t be following through with his promise for tax cuts and spending. Even members of the Federal Reserve believe that the President-elect will deliver. A number of Federal Reserve Presidents spoke Thursday but only 2 are voting members of the FOMC this year (Evans and Harker). Both gentleman said 3 rate hikes in 2017 is plausible. Thursday morning’s U.S. economic reports also showed improvements in the economy with jobless claims increasing less than expected and import prices ticking up. Retail sales, producer prices and the University of Michigan consumer sentiment numbers are scheduled for release on Friday and these reports should confirm the improvements in the U.S. economy. Stronger data should be positive for the dollar with one small wrinkle -- the forecast for spending is very high. So if the data misses slightly, we may have an initial drop in USD/JPY that should be recovered quickly as investors realize that, ultimately, the data reflects a stronger economy.
Euro extended its gains against the U.S. dollar Thursday, coming within 15 pips of 1.07. Stronger-than-expected industrial production activity in the Eurozone helped to support the currency. Since basing at the beginning of the month, euro has enjoyed a strong recovery against the U.S. dollar. A large part of that had to do with the improvements in the economy and the upside surprises in data. The euro's weakness has gone a long way in supporting the economy and boosting inflation, leading ECB member Villeroy to say that growth will be solid in 2017 and, according to the ECB minutes, headline inflation is rising significantly. If all of this keeps up, it won’t be long before the central bank needs to consider tapering. Yet it is also important to recognize that the euro is rising because the U.S. dollar is falling. So if the Trump unwind recedes, EUR/USD will give up its gains.
In contrast, sterling traded lower against the greenback and the divergence between the performance of euro and pound sent EUR/GBP up nearly 1%. There were no U.K. economic reports released on Thursday so sterling flows were dictated by the market’s appetite for U.S. dollars. Gains into the 1.23 territory could have been feasible had it not been for news that PM May would be making a major Brexit speech next Tuesday. With so much uncertainty related to Britain’s exit from the European Union, the mere mention of the word seems to have lead to apprehension among traders. The UK remains quiet for the rest of the week with no market-moving data expected on Friday.
All 3 of the commodity currencies performed extremely well against the U.S. dollar Thursday with NZD leading the gains. Gold gained close to 1% for the day, signaling the 4th consecutive gain this week. In total, gold's gain has been able to boost both the Australian and New Zealand dollars. The largest gainer of the group was the Kiwi, which cleared the 0.71 handle on offers into the AUD/NZD. The Aussie was also able to break above 0.7500 though it's not clear whether it will hold above that key level. The Canadian dollar saw the narrowest gains for the day. Besides the weakening US dollar, the Loonie got a boost from rising oil prices, which moved above $53 per barrel, marking a gain of over 1.5%. That gain came in light of comments made by OPEC Secretary General Barkindo, who said that he was confident cartel members and other oil producers were sticking to their production-cut plans. Chinese demand for oil also helped buoy prices as data showed that demand in November increased by 4.1% compared to last year. Data from Canada was less encouraging as new home prices rose less than expected. Both AUD/USD and NZD/USD are trading right below their 100-day SMA -- a prime place for reversals.