FX market outlook

FX market outlook

Dollar extends sell-off following lack of economic policy details from Trump.

The US dollar sold off following the press conference of President-elect Donald Trump as there was little in the press conference itself to suggest that fiscal stimulus in the form of tax cuts or infrastructure spending was imminent once the new President assumes office on January 20.

The dollar index lost almost 2 percent from its pre-conference high as it fell from 102.95 to today’s Asian session low of 101.14.  Given the lack of fiscal policy details and Trump’s focus on the intelligence agencies, pharmaceutical companies and Mexico, some market participants questioned whether the “Trump rally” in the US dollar since early November was fully justified.  In addition, the tone of the press conference seemed to be less like the conciliatory approach in Trump’s victory speech after the elections and more in the style of his election campaign rhetoric.  Many believe that once Trump assumes power he will adopt a realistic style of government, away from the rhetoric of the campaign.  On a more positive note, Trump’s conference did not contain any new protectionist threats towards China.

Hardest hit was dollar / yen, as the pair fell from 116.8 pre-conference to 114.40 in late Asian trading today.  The session low at 114.25 represented a 1-month low for the pair.  The yen is also a safe haven currency as well as posting the biggest losses among majors due to the dollar’s “Trump rally”, so it was natural for it to reverse the most on dollar-negative news.  The euro also managed to strengthen to as high as 1.0642, which was its highest in 1 ½ week.  Sterling also benefitted from the weaker dollar as it quickly climbed to 1.2269 in the immediate aftermath of the conference.  It then tried to consolidate those gains.  The one currency that slipped against the dollar and made a new low in the process was the Mexican Peso as dollar / peso briefly traded above 22 at 22.03.  The peso limited its losses by coming back to 21.83 in Thursday’s Asian session.  The peso lost ground after Trump threatened US companies that produced in Mexico and tried to sell back to the United States, with a special tax.

The Australian and New Zealand dollars took advantage of the greenback’s misfortunes by rising to 0.7486 and 0.7105 against the US currency respectively.

Gold also climbed to a 7-week high to touch $1200 an ounce on the dollar’s retreat, while oil recovered from a weekly inventories-induced drop to climb back above $52 a barrel.

In economic news, French final inflation for December came in line with expectations at 0.8% year-on-year.

Looking ahead to the remainder of Thursday, Swedish inflation for December and Eurozone industrial production for November will be watched.  Out of the US, weekly jobless claims and import / export prices for December will also attract some attention.