Forex Today - USD strength arrested by Trump comments on the Fed and US dollar

Market Analysis /
Greg McKenna / 20 Jul 2018

Welcome to my Forex Today column where I'll give a brief wrap on the key drivers of Forex markets and throw in a chart of the day. 

As ever, feedback welcome....oh and for AUDUSD specifically you can find that in My Australia Today piece each morning on the blog. 

QUICK SUMMARY (sort of quick, big news today)

China opened the door to a significant Yuan devaluation yesterday with comments from its forex regulator reflecting an apparent laissez-faire attitude toward the rise in USDCNY and the impacts it might have on the Chinese economy.

That set in train a solid surge in the US dollar across the board. One which saw offshore Dollar/Yuan up through 6.80 and onshore close to that level. It also drove the Euro down to 1.1577, saw USDJPY back above 1.13, the Pound down near 1.2950 and the Aussie around 0.7322.

But that was before CNBC scooped the market with an interview in which President Trump suggested he wasn’t happy with the Fed raising rates and then highlight that the EU and China are getting a lift as their currencies weaken and the USD strengthens. It was a layman railing against Fed hikes and that’s where most of the coverage went. But it’s the comments on China and the EU currencies in the context of the trade war which I find most interesting. We’ll hear more on that if the USD strengthens materially.

So, as I write the USD is still strong and off the post-Trump highs, but has given back a significant portion of its gains. The DXY is at 95.16 up 0.1%, Euro is at 1.1645 largely unchanged while USDJPY is back at 112.41 for a loss of 0.3% as risk goes a little offered. Sterling is still weak at 1.3014, down 0.35%, as Brexit uncertainty and weak retail sales (-0.5%, 0.2% exp) undermined its prospects.

The Chinese Yuan has lost 0.8% in onshore terms and 0.66% in offshore terms now at 6.7883 and 6.7701 respectively. That, and growing concerns about the impact of the trade war on growth have weighed on the Aussie dollar which was pretty strong after yesterday’s massive 50k jobs print. It’s a little less than a cent off the highs at 0.7357 for a loss of 0.5%. The Kiwi lost 0.65% to 0.6746 and the CAD is 0.73% weaker with USDCAD at 1.3267.

Currency is now part of the trade war folks – but the commodity bloc may lag even if the USD comes under pressure given Trump's rhetoric fairly screamed doubling down against the EU and China in this battle.

BIGGER PICTURE

I don’t know.

Am I allowed to say that? Aren't I supposed to put forward a veneer of prescience when it comes to my market prognostications? Yeah, I know I'm supposed to talk as if I know exactly what's going to happen. But when you trade as well as write the reality is often I feel more like John Snow than one of the Oracles at Delphi. 

You know nothing Greg McKenna. 

So I'm wondering today. I'm wondering if the President's intervention last night in the Fed and US dollar markets is important.

In real terms, the President’s comments about the USD, or more particularly the Yuan and Euro, wouldn’t normally faze me. It’s hardly central bank intervention after all. And even if it were I’d normally write that unless its concerted intervention with multiple central banks sending a signal the Yen, Euro or some other currency’s move needs to stop that the market will just roll over the CB and get back to business.

But I just don’t know. This President is an interventionist. Look at what’s he’s achieved in Pharma pricing, on oil supply, and what he’s driving at with trade and tariffs.

So, it’s not enough to just trade on the fundamentals or even the technical short term. Because the risk is I get stopped out by the headline-chasing robots that roam the market landscape at the moment. That and liquidity air pockets, means moves are exaggerated in the very short term.

But when you think about what Trump said last night it fits with the narrative markets have been starting to move toward, and it fits with some of the Fed’s own concerns about its path.

Powell stressed the base case of a strong economy and more rate hikes but he also entertained the downside of the trade war. Last night’s comments from the President reinforce to me he’s going to prosecute this war until he wins and his targets fold. China doesn’t feel like its going to after yesterday’s comments on the Yuan and Larry Kudlow. Europe might, Angela Merkel and German car makers already seem predisposed to go to zero tariffs. But then Trump will just go after the rest of the EU trade surplus.

So what to do?

Follow the price action is the best bet. And that means following the data. Jobless claims and the Philly Fed in the US, and retail sales in the UK were another reminder that the US is in a very different place economically than other nations. As a sidebar, surprisingly Australia is starting to appear like it might be in a slightly better spot than many thought. But the overarching message from all this is if the US economy continues to print strongly the Fed will raise Fed funds into the 2.5%/2.75% region before it backs off. The risk now though is what the president says as that cycle transpires.

Leaving that aside - I remain a USD bull. The question though is whether we get a decent bounce in the Euro and others from here. That's what I don't know. 

Today’s chart is of GBPUSD on a weekly basis using the Double BB strategy. In it you can see that that even with the recent rally GBPUSD stayed below the 13 week ema which – in this strategy – is used as a trend indicator. The outlook is still for lower levels. 1.29 – the 61.8% level of the run from the lows in late 2016 – is the level to watch now.   

Click on me, I'll expand
Click on me, I'll expand

DATA:

On the day it’s fairly quiet. We get Kiwi visitor arrivals and then Japanese inflation data before tonight's release of German PPI. We also get inflation and retail sales in Canada.

Have a great day's trading.

Greg McKenna

Chief Market Strategist

gregmckenna.com.au

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