The US dollar is broadly lower against major and emerging market
currencies. It has given up yesterday’s gains and more. The
proximate cause appears to be comments by President-elect Trump in a Wall
Street Journal interview.
There are two parts of Trump’s comments that would have likely weighed on
the dollar separately, and together they seem to be worth between 0.5% and 1.0%
for the major currencies. First, Trump pushed against the
“border adjustment” plan from Republicans that would have taxed
imports and exempted exports. He said it was “too
complicated.” Recall, many economics, including Harvard’s Martin
Feldstein, argued that the tax would spur an “automatic” 20-25%
increase in the dollar.
Second, Trump specifically said the dollar was too strong. The
context was about China, but the remarks seemed to have broader
implications. “Our companies can’t compete with them [China] now
because our currency is too strong. And it is killing us.” He
said the yuan was “dropping like a rock” and the central bank was supported it simply “because they
don’t want us to get angry.”
The investment community, like Americans themselves, is grappling with how literal to take the
seemingly visceral remarks. Some of
the strident positions taken during the campaign have been softened, including
the nomination of at least five men from Goldman Sachs, not pushing for
criminal charges against Clinton, and citing China as a currency market
manipulator on Day 1 (which, in any event, is now said to be not the day after
inauguration but Monday January 23). It is the uncertainty that is
weighing on the greenback today.
In the larger picture, of the numerous factors that impact foreign
exchange rates, the wish and desires of officials do not often seem to be
particularly salient. Our long-term bullish outlook for the dollar is based on the divergence of monetary policy,
the relative health of the financial
system, the anticipated policy mix, and the uncertainty surrounding this year’s
elections in Europe.
The highlight of today was supposed to be UK Prime Minister May’s speech
on Brexit. Much of what she is going to say is believed to have been largely reported with advanced
extracts. The essence of the approach is a “clean break” with the EU, including the single
market. Also, we expected the time frame for triggering Article 50
remains the same, end of Q1. That said, recall the Supreme Court ruling on the role of Parliament and the snafu in
Northern Ireland pose risks to the plans.
Sterling gapped lower yesterday in Asia, falling below $1.20 briefly
after Chancellor of the Exchequer Hammond appeared to threaten sharp cuts in UK
corporate tax rates if necessary to remain competitive in post-EU
circumstances. It filled the gap today, which extended a little above
$1.2120. Sterling approached $1.2190, with the help of a firmer CPI (1.6% up from 1.2% in November, and
the highest since July 2014, with the core rate also firming. A break now
of $.12080 would suggest the short-squeeze may have run its course.
The ECB meeting in a couple of days
is another highlight of the week. The euro slipped to $1.0580
yesterday and rallied a cent by early European hours today. It stopped
just shy of last week’s high set on January 12 at $1.0685. Intraday
technicals, like for sterling, suggest the North American dealers may be more
constructive on the dollar as it was several days last week. Initial support for the euro is seen near $1.0620-$1.6030.
The German ZEW had a little
perceptible impact. The January reading saw improvement, more in the
assessment of the current situation (77.3 from 63.5 and 65.0 median guesstimates in the Bloomberg survey) than in expectations (16.6 from 13.8 and 18.4
median). The final estimate of Germany’s December CPI will be
released tomorrow. It is expected to confirm the 1.7% preliminary
estimate, and is a timely reminder ahead of the ECB meeting of the challenges
of a one-zone fits all monetary policy.
The dollar’s recent losses against the yen are being extended today. The greenback fell to almost
JPY113.00, its lowest level since December 5. In addition to the broad
dollar decline today, other drivers seem
to be also encouraging short-covering of previously sold yen positions.
US 10-year yields are six basis points lower at 2.33%. The low point last
week was almost 2.30%. Recall that the yield peaked near 2.64% in the
middle of December. Also, US equities are trading lower, with the S&P
are called to open around 0.5% lower. The Nikkei itself gapped
lower (gap:19043-19061) and closed off 1.5%, for its biggest loss since the US
election. It closed on its lows, which has not been seen since December 8.
The dollar lost 0.6% against the Chinese yuan. At a little
below CNY6.86, the dollar is at its weakest against the yuan since
mid-November. While this likely reflects the broadly weaker dollar,
China’s overnight repo rate jumped 23 bp
to 2.40%. This does not seem to be tied to the short squeeze officials
engineered early this month in the offshore yuan. Instead, the onshore
pressure comes from the tightening of conditions ahead of the Lunar New Year
holidays. The PBOC has tried to offset the shortage by injecting a
relatively large amount (net CNY270 bln or
~$39 bln) the most since last January. The Lunar New Year holiday runs
from January 27 through February 2.