In FX – The Trump Dump Continues

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Market Drivers January 23, 2017
Dollar selloff continues
US rates slip
Nikkei -1.39% Dax -0.39%
Oil $52/bbl
Gold $1212/oz.

Europe and Asia:
No data

North America:
CAD Wholesale Trade 8:30

The dollar was weaker across the board on the first trading session of the week as markets continued to react to President Trump inaugural address and executive actions that suggested he will pursue confrontation rather than compromise on all fronts.

The dollar weakened in the wake of Mr. Trump’s extraordinary bleak inaugural address on Friday that emphasized protectionist tendencies and confrontation with the world at large which clearly repelled investors as all capital markets sold off. On Monday the risk off sentiments continued with USD/JPY dropping to a low of 113.17 in Asian session trade before finding a modicum of support. The pair was down nearly two big figures since the Inauguration and is now well below the 115.00 level.

It’s too early to tell if this dynamic will persist, but clearly “buy election sell inauguration” appears to be the evolving theme not only in FX but all other capital markets as well. US 10 year yields were below the 2.5% mark once again while US equity futures and crude were all trading lower.

Investors are losing the enthusiasm for risk, now that Mr, Trump has to actually govern and grapple with the issues at hand. Mr. Trump’s hard line stances on trade, ACA and executive branch regulations indicate that he will bring to the Presidency the same pugnacious style that he brought to the campaign. Whether he succeeds remains to be seen, but markets have clearly been taken aback by confrontational style of politics and unless the US economy shows some rapid improvements in growth, the enthusiasm that accompanied Mr. Trump into the office will quickly turn into fear as investors begin to consider the costs of his protectionist policies and bare knuckles style of governing.

Mr. Trump comes into the office with the highest consumer sentiment readings since 2004 and the rise in the dollar that has accompanied this trend is predicated on further improvements in final demand that would drive spending in Q1 of this year. However, Mr. Trump is also the least popular President to assume the office in more than 50 years and his tone in the first 48 hours of this rule has done nothing to increase those ratings.

If the political narrative continues to spin against him, investment sentiment is likely to sour as well. For now the dollar is simply in a normal correction as USD/JPY remains above the key 112.50 support level, but if it begins to break below those levels the price action would then indicate that the long dollar trade could be in much more serious trouble.

Boris Schlossberg
Managing Director

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