Trump Deflates USD Ahead of Inflation Data

Strong dollar comments put currency on back foot

Donald Trump added another unusual action to his growing list of Presidential duties. It is usually the job of the Treasury Secretary to lament the strength of the dollar and point to China for their hand in manipulating their currency. This time the president-elect could not wait for after his inauguration and gave an interview to the Wall Street Journal where he said the American currency was “too strong”. The USD has lost close to 1 percent versus majors since the interview was published.

U.S. consumer prices will be released on Wednesday, January 18 at 8:30 am EST with a forecast of 0.3 percent rise month-over-month. Inflation expectations have risen after the election due to the infrastructure spending promises from Trump. Higher U.S. inflation would compel the U.S. Federal Reserve to raise interest rates in 2017.

The Bank of Canada (BoC) will release its interest rate announcement and monetary policy report on Wednesday, January 18 at 10:00 am EST. Governor Stephen Poloz will host a press conference starting at 11:15 am EST. The BoC is expected to keep rates unchanged at 0.50 percent in the first meeting since before the U.S. elections. The rate differential with the American interest rate widened after the Fed rate hike in December, but not enough to force an immediate reaction by the Canadian central bank although if anybody favours a pre-emptive move it would be the Canadian central bank governor, although unlikely without knowing the full extent of the effect of Trump’s policies on the Canadian economy.

The EUR/USD gained 0.893 percent in the last 24 hours. The single currency is trading at 1.0699 after the USD is weaker coming out of the Martin Luther King holiday and the comments from president-elect Trump about a strong dollar. The rally that started with the presidential election win by Donald Trump is facing its first major hurdle. The more the president-elect talks about stimulus spending the more the dollar appreciates, vice versa a focus on immigration and anti-trade rhetoric hurts the market rally given the implications for corporations.

With inauguration at the end of the week Donald Trump will take office. Markets are hoping for more clarity on his ambitious plan to Make America Great Again and for its part the U.S. dollar and global stock markets are receptive to infrastructure investment and fiscal stimulus, but not so much to tariffs and protectionism.

The USD/CAD lost 0.76 percent in the last 24 hours. The currency pair is trading at 1.3054 after the USD is weaker after comments from U.S. president-elect Trump and disappointing manufacturing data. the Empire State Manufacturing Index dipped to 6.5, short of the forecast of 8.1. The reading is still positive, but comes after the index hit an 8 month high in December. Business conditions were mixed with employment components weak however future confidence was high at a multi-year high of 49.7. Overall the U.S. dollar was weaker and fell against the CAD ahead of the Bank of Canada (BoC) statement tomorrow.

The Canadian currency has not given much ground against the USD since the election in comparison with the Mexican peso. The Mexican and Canadian economies depend on their neighbour in the middle as the majority of their exports ends up in the United States. Trump has targeted Mexico bound plants and products, focusing on the automotive industry but so far has not mentioned Canadian operations, although it is implied they would fall under the same border tax. The majority of analysts expect the BoC to stand pat on rates for most of this year, but there is a growing minority that see a rate hike not too far off into the future. The timing of a Canadian interest rate hike would be dictated by a surge in American growth that could benefit Canadian fundamentals regardless of tariffs or anti-trade policies if the currency keeps exports competitive.

Market events to watch this week:

Wednesday, January 18
4:30am GBP Average Earnings Index 3m/y
4:30am GBP Claimant Count Change
8:30am USD CPI m/m
8:30am USD Core CPI m/m
10:00am CAD BOC Monetary Policy Report
11:15am CAD BOC Press Conference
7:30pm AUD Employment Change
Thursday, January 19
7:45am EUR Minimum Bid Rate
8:30am CAD Manufacturing Sales m/m
8:30am EUR ECB Press Conference
8:30am USD Building Permits
8:30am USD Philly Fed Manufacturing Index
8:30am USD USD Unemployment Claims
11:00am USD Crude Oil Inventories
9:00pm CNY GDP q/y
Friday, January 20
4:30am GBP Retail Sales m/m
8:30am CAD CPI m/m
8:30am CAD Core Retail Sales m/m

*All times EDT
For a complete list of scheduled events in the forex market visit the MarketPulse Economic Calendar

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza