Dollar Slips Further on Trump Worries

The US dollar started this new trading week on its back foot, weakening against all of the major currencies. In our note on Friday, we talked about the possibility of further losses for the greenback but we did not expect it to happen so quickly. Investors are worried about President Trump’s policies following reports that China is pessimistic about trade talks. The President also held a meeting with Fed Chairman Powell after which he expressed satisfaction with their discussion on everything from interest rates, negative rates, easing and dollar strength.

Although we are highly skeptical of Trump’s ability to influence Fed policy, the shift away from his usually critical tone suggests that Powell reassured him that policy would remain accommodative, which is negative for the currency. Of course this is also consistent with the central bank’s concerns about risks and their overall view that low interest rates are here to stay. Reports that China isn’t happy with trade negotiations are probably valid – they are distracted with domestic problems (HK, growth, the latest release of documents relating to the lockup of Uigher Muslims) and will most likely wait out US impeachment hearings and perhaps even the November election. Human rights concerns could give the Trump administration stronger reasons to maintain their tough stance on China. In reaction, the US dollar sold off with the Australian and New Zealand dollars trailing not far behind. However by the end of the NY session, recoveries were seen in all of the major currencies as investors realize that not much has changed. The Fed maintains the same policy and trade uncertainties persists.

With that said, we continue to look for USD/JPY to extend lower and the Australian dollar to underperform. The minutes from the last Reserve Bank of Australia meeting are scheduled for release this evening and the central bank is widely expected to maintain their dovish outlook. The New Zealand dollar on the other hand should outperform as data validates the central bank’s decision to keep interest rates on hold. Service sector activity accelerated in the month of October, mirroring the improvement in manufacturing. Producer prices are scheduled for release later today and we expect the uptick in consumer prices to carry over to PPI.

The best performing currencies today were sterling and euro. No economic reports were released from either country but the first televised debate is tomorrow and Boris Johnson’s party is well ahead of Labour. The market also likes that he is talking about tax relief and increased spending. Euro is one of our favorite currencies this week – there are no major economic reports until Friday when ECB President Lagarde speaks so for the time being it is enjoying the residual impact of last week’s better than expected GDP report.

We also like the Canadian dollar which is setting up for recovery. After rallying for 2 weeks straight, the stability in oil prices and sell-off in the US dollar led the pair to find resistance at the 200-day SMA. This week Canadian CPI and retail sales are scheduled for release. There will also be speeches from Bank of Canada Governor Poloz and Deputy Governor Wilkins. Poloz spoke earlier this week and he did not say much about the economy or monetary policy outside of a comment that wage inflation is now above 4% by most measures and that the labor market is telling us more than GDP data.