FX market outlook

FX market outlook

Dollar steadies after Trump protectionism-related sell-off.

The US dollar steadied during Asian trading after the dollar index briefly traded under the 100 level, while dollar / yen traded at its lowest in almost 2 months.

The US dollar index dropped to 99.92 before rebounding to 100.21 in late Asian trading as support emerged for the greenback.  In addition, dollar / yen fell to as low as 112.52 before recovering above the 113 handle at 113.12.  Overall trading was volatile – particularly in dollar / yen as Japan was a co-signatory in the now scrapped TPP deal.  Japanese manufacturing PMI rose during January to 52.8 from 52.4 the previous month.

During his very first day office, President Donald Trump gave clear signs of the protectionist policies he plans to follow by signing an executive order that annuls the participation of the US in the Asia-Pacific Trans-Pacific Partnership (TPP), while pledging to renegotiate the North American Free Trade Agreement with Canada and Mexico.  During a meeting with businessmen, Trump also promised to slap a “big border tax” for manufacturers that export goods into the United States from neighboring countries.

In addition to the trade restrictions, the White House also vowed to stop China from taking the South China Sea islands; a move that the Chinese press has warned would require the US to “wage war”.  This created some geopolitical uncertainty as well, as tensions with China could rise in coming months.  Finally, Trump’s nominee for Treasury Secretary, Steven Mnuchin warned against an “excessively strong dollar”, which could have a negative short-term effect on the economy.  This was also negative for the dollar, although it is not exactly clear what the US administration can do in practice to weaken the greenback.

In positive news for the US economy, Trump also reiterated his commitment to lowering taxes for the US middle class and businesses.

The euro slightly extended its previous day’s 2-month high against the dollar by rising to 1.0771 I early Asian trading, before coming back down to 1.0750.

Looking ahead to the European session, the focus will be on Eurozone preliminary manufacturing and services PMIs for January, which are expected to improve slightly compared to the previous month.  French PMI numbers, which were announced first, posted a significant improvement.  Later in the day, existing home sales out of the US for December will provide an update for the country’s housing market given the recent rise in mortgage rates.