What do you do if you want a currency to move 100 pips in 24 hours in mid-August? The answer is simple; wait for a President to talk down his currency and criticize his central bank.
No, this is not Turkey, this is the US, where President Trump pulled a ‘President Erdogan’ and told Reuters on Monday evening that he was not happy with the Fed’s interest rate hikes, that he would prefer a low dollar environment and he accused China and the EU of being currency manipulators. This sent the dollar index, the dollar vs. its major trading partners, tumbling, and it has continued to fall on Tuesday, it is now the second worst performing currency in the G10 apart from the yen.
Why so trusting of trump?
It is interesting that the FX market has reacted so strongly to Trump’s dollar comments. A mere 5 days ago the same President said that ‘money is pouring into our cherished DOLLAR like rarely before’, usually when money pours into a currency that currency tends to appreciate. Also, back in January he said that ultimately he wanted a strong dollar. If you base your FX trading strategy on President Trump’s musings on the dollar, you may as well be a Trump contrarian as the chances are he will reverse his view in a few days.
Why the market is failing to punish Trump
Usually, when a President criticises their country’s central bank the markets seek revenge, look at the Turkish Lira, down more than 60% vs. the dollar so far this year. The Borsa Istanbul 100 index is down some 25% since the start of the year. However, if you are the US President and you cut taxes and the economy grows then it appears you are immune from market retribution, the S&P 500 is 15 points away from the record high reached in January. As we mentioned on Monday, the recent rise in the S&P 500 has been broad-based, and led by a mixture of sectors, which suggests a healthy rally. Even some of the most beleaguered FAANGS, like Netflix, have started to pick up, and Tesla managed to end the day higher on Monday, as the buoyant market mood managed to seep into the embattled electric car maker.
Why the bond market is always King
Perhaps the key to this rally is not President Trump and his dollar comments, but instead it is down to the bond market. The US yield curve (the 10-year yield – the 2-year yield), had been inverting since February, which is a sign of higher interest rates now and potential lower interest rates, and recession, down the line. This has stabilised in recent days, suggesting that the market may be re-considering how high rates will rise in this current cycle, which could reduce the risk of recession down the line. If the yield curve was to steepen in the coming weeks then this may be good news for US stocks, as it would suggest that rates won’t move that much higher, however, it could weigh on the dollar.
Whether or not the US yield curve continues to remain inverted or if it starts to steepen, could be determined by this weekend’s Jackson Hole central bankers’ symposium, and particular attention should be paid to Fed chair Jerome Powell’s speech and any hints he gives about the Fed’s path for interest rates.
Could the UK be in line for a US-style tax cut?
Elsewhere, the pound received a boost after the UK recorded the biggest Government surplus for 18 years, with borrowing down as well as tax take up. Total tax take is up some 4.5%, which suggests that the improvement to the UK’s public finances could be down to permanent rather than temporary factors. It may also be a sign that the Chancellor has room to cut taxes ‘US-style’ in his Autumn budget, in time to give the UK economy a boost ahead of Brexit. GBP/USD bounced back above 1.28 on the news; however, it has stalled this afternoon just below 1.2850, making this a key level of resistance as we move towards Jackson Hole.
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