Trump on Deck Will Dollar Turn Into a Wreck?

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Market Drivers January 11, 2017
Dollar finds small bid Europe
Cable touches 1.2100 figure after Trade deficit widens
Nikkei 0.33% Dax 0.29%
Oil $51/bbl
Gold $1188/oz.

Europe and Asia:
GBP UK IP 2.1% vs. 0.8%
GBP UK MP 1.3% vs. 0.5%
GBP UK -12.1B vs. -11.2B

North America:
Trump presser 11:00

The dollar was mildly in early European trade today as US yields improved helping to push USDJPY back above the 116.00 figure while both cable and euro weakened as well. The commodity dollars performed better holding their levels from yesterday.

The only data of note was from UK where the Trade deficit widened to -12.B versus -11.2B eyed. Although both Industrial Production and Manufacturing production printed well above estimates, the miss in trade data was enough to send sterling below the 1.2100 mark, though the pair rebounded quickly.

Although lower pound is certainly helping UK exporters with exports rising 5,1% versus 2.3%, the benefits are being offset by the rise in imports which jumped 9.3% versus -7.8% prior. Meanwhile domestically, UK economy continues to perform well with today’s manufacturing data just the latest beat of consensus numbers.

Cable has tested the 1.2100 level now four times and so far buyers have materialized at that level every time, so if it can consolidate for a few more days the pair could be ready for a short covering rally, as concerns about hard Brexit dissipate.

Meanwhile focus in North America will turn to Donald Trump’s first press conference before he takes reins of office in 10 days. Overnight major media released an unsubstantiated report prepared by former British intelligence agent that claimed Russian authorities had compromising sexual evidence against Mr. Trump gathered during his stay in Moscow in 2013 for the Mrs. Universe pageant. Mr. Trump quickly denied the allegations as false news and markets appear utterly unconcerned about the prospect of scandal assuming that the reports are indeed false.

Yet the report is not false, but simply unsubstantiated and if further evidence begins to trickle in that could implicate Mr. Trump the risk to the dollar could be immense. Even if utterly false the report has now put the focus back on politics rather than economics and if Mr. Trump spends most of his presser defending against allegations rather than emphasising his plans for economic reform, the capital markets could begin to sell off. The biggest danger is that the Trump rally which has been fueled by expectations of strong increases in US economic growth, could quickly unravel if Mr. Trump appears hobbled by political concerns. So far the markets are not pricing any such scenario into the mix, but it could be primary risk going forward.

Boris Schlossberg
Managing Director

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