Setback for Trump Means Bruises for Dollar

Investors don’t need to look any further than the Trump Administration’s failed bid to repeal Obamacare for an explanation on why the U.S. dollar is getting crushed today. A setback for Trump means a setback for the greenback as it casts doubt on the Administration’s broader strategies. The Republican Party has been divided by Health Care reform and while Party leaders hope they will be unified by tax reform, but there’s resistance from the conservative House Freedom Caucus who want broader spending cuts and more details on the tax reform package. Of course with mid-term elections coming up next year, the Republican party is very motivated to get something done by December. Chances are progress on tax reform will be slow with many challenges along the way which opens the door to further dollar weakness. U.S. data continues to miss (the NAHB housing market index dropped to its lowest level 8 months), investors are growing more skeptical of fiscal reform and Treasury yields fell sharply today. As a result, USD/JPY could drop to 111.00-110.50, EURUSD should test its May 2016 high of 1.1616 and USDCHF should break 95 cents. Housing starts and building permits are scheduled for release tomorrow – they are expected to rebound which could help the dollar, but it won’t be enough to reverse the market’s attitude towards the greenback.

Euro rose to its strongest level in 14 months on the back of short covering and U.S. dollar weakness. This was the third straight day of gains for the currency and puts EUR/USD up 10% year to date. The Euro is the best performing currency in 2017 with the move driven by data, positioning and the market’s shifting outlook for the U.S. dollar. There’s no doubt that European Central Bank President Draghi will be hammered with questions about the currency and its impact on inflation and the general economy. Germany is entering a period of uncertainty with the ECB thinking about shifting policy and the federal election scheduled for September. This explains why the ZEW survey fell for the second month in a row. Investors are growing nervous about what could transpire over the next few months and the strong rise in the euro isn’t helping. However if we look slightly longer term over 5 years for example, EUR/USD is trading closer to its lows near 1.04 than its highs near 1.40. So the ECB could lean either way – they could focus on preparing the market for taper or ease the uptrend by emphasizing the need for continued policy accommodation. For the time being, the market thinks they will be hawkish and with EUR/USD breaking above 1.15, the next stop could be the 2016 high near 1.1616.

The best performing currency today was the Australian dollar, which rose to a 2 year high versus the U.S. dollar. Today’s 1.6% rally was the strongest move we’ve seen in AUD in months. The U.S. dollar is falling, commodity prices are rising but it was the RBA’s optimism that sent the currency soaring. According to the minutes from the last central bank meeting, the RBA believes that the strong labor market removes some of the downside risks in wages and the quarterly economic growth most likely increased in Q2. They made no mention of a rate hike but their neutral stance was enough to satisfy the bulls. Technically, the next stop for AUD/USD should be the 200-month SMA near 0.7980 but AUD traders need to keep a close eye on the speeches by RBA officials this week as Heath, Debelle and Bullock could use these opportunities to talk down the currency. NZD also rose in sympathy with AUD, climbing to its strongest level in 5 months versus the U.S. dollar. Dairy prices rose 0.2%, which is too small for investors to forget about all other data disappointments. The Canadian dollar on the other hand continued to march higher, rising to its strongest level in more than a year. It shouldn’t be long before USD/CAD hits 1.25.

Last but certainly not least, the only currency that underperformed the U.S. dollar today was sterling. As soon as members of the Bank of England started talking about removing stimulus, investors questioned their resolve. With consumer prices stagnating in the month of June, it is hard for anyone to believe that the BoE will raise interest rates this year, let alone in August. The year over year inflation rate slowed to 2.6%, the first pullback since October. If retail sales also miss GBP/USD could drop the 1.28 handle.