Equity markets have been trading flat ahead of the US presidential inauguration while the US Treasuries sold off, but certainly, there’s a sense that the post-election honeymoon is over. The primary focus is all about position and is political, given the ambiguities. While dissecting recent political musings, it has been a challenging week for traders. Price action indicates a high level of uncertainty, as short term fast money traders dominated price action overnight. However, the longer-term dollar longs have been drastically trimmed, and I suspect the overall market is now in a better equilibrium as the Presidential inauguration approaches.
While the inauguration is dominating headlines, simmering on the back burner is the overriding theme of US protectionism, expressly directed at China. With so many prominent trade hawks joining the Trump administration, it all points to a massive shift in US trade policy. That does not paint a rosy picture for regional APAC exporters, nor countries like Australia, which play such a vital role in the global supply. chain.
The road map for the stronger dollar bisects three critical crossroads. US economic data, FOMC decipherability and the Trump policy catalysts. While a high level of circumspect surrounds the dollar Bull Run, US economic data supports, and the Feds have green-lighted many 2017 rate hikes, it all falls to most anticipated USD commercial venture since the Reagan era, Trumpenomics.
Dr Yellen Effect
Early price action is driven by the just released text of a speech by Fed Chair Yellen in San Francisco. There is no sign of the Feds “pumping the breaks “ as she is definitively anticipating a huge uptick in domestic economic activity once Trump administration Fiscal Spend and Tax reform are rubber stamped. Dollar bulls are running with this news as the implication for a sharper repricing of the Fed curve higher remains high. Of course, everything is predicated on the Trump administration fiscal policy. However, just when everyone with quick to sound the big dollar death knell Dr Yellen has breathed life into the beleaguered Greenback. Seriously, folks, it doesn’t get much more hawkish than that from Dr Yellen
There was simply too much uncertainty to support the AUD’s recent move above.7550, where it clearly struggled to gain traction over the past 24 hours. The US dollar was in recovery mode after its recent Tump-induced shellacking. Nonetheless, the AUD trades constructively, with an unwinding of Trump trades and supportive commodity prices.
All eyes are on the domestic employment front this morning, but I expect local markets to be dominated by political events and follow through on Yellen’s very hawkish lean this morning.
This morning Australia Employment report was underwhelming and the six months low in the Unemployment rate should open the door for a peek below .7500 more so if the broader USD strength we’ve seen in early trade continues
US 10 Year yields have surged to 2.43 post-Dr Yellen’s speech and with the tight correlation between USDJPY with US fixed income, Foreign Exchange traders were quick to embrace the Greenback in early trade. However, we need to be very cautious chasing top-side USD this morning, as much of the move has been on the back of fast money traders. I sense many of the dominant longer-term trend traders are waiting for clarity on Trump’s policies before re-engaging the long dollar position in size. There has been much bloodletting on the street the past few days, so an air of caution remains thick.
The broader dollar picture dominated trade overnight. US Treasury yields rallied overnight, underpinned by Hawkish Fed speak. Also, it was pedal to the metal for Dr Yellen today who suggested the US economy is expected to outperform.
The question is, is she now supporting the three hike camp? Certainly, dealers will be looking for clarity on the March FOMC
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