USDJPY Dump Post Trump

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Market Drivers February 6, 2019
RBA Lowe does an about-face

Nikkei 0.10% Dax 1.71%
Oil $53/bbl
Gold $1314/oz.

Europe and Asia:
No Data

North America:
CAD Ivey PMI 10:00

It was risk off night in FX as high beta currencies reversed yesterday’s gains in the wake of dovish comments by RBA Governor Lowe and the typically bellicose rhetoric on President Trump in his State of the Union speech.

In Australia, Governor Lowe did a sharp about-face in the aftermath of yesterday Monetary policy statement, noting that risks were now evenly balanced as downside risks to the domestic economy have increased. By moving squarely into neutral territory Mr. Lowe eliminated the prospect of any rate hikes in the foreseeable future with some Australian banks now projecting that first hike may not come until 2020.

Unlike yesterday’s RBA statement which appeared to be relatively sanguine in its assessment of risks, Governor Lowe stressed the challenges posed by the brewing trade wars across the globe and the tightening of credit at home would keep the central bank stationary for the time being. The Aussie quickly reacted to the shift in tone losing more than 1% through Asian session trade as it broke below .7150 and looked ready to test the key .7100 support level into European and North American dealing.

In North America, President Trump offered his usual litany of dystopian woes as he focused on the problem of illegal immigration on the southern border and used highly charged rhetoric to blame that population for criminal acts. He built exactly zero goodwill across the aisle suggesting that his relationship with Democrats will only grow more confrontational introducing an element of political risk into the US economy.

More importantly, he offered no evidence of progress in trade talks with China and continued to ratchet rather than lower his rhetoric on the matter. USDJPY which hovered around 110.00 for the past 24 hours quickly turned south and remained lower at 109.70 in the aftermath of the speech which left a very bad aftertaste in investors mouths. Trump’s confrontational rhetoric and bluster were exactly the type of action that investors did not want to see and there is risk that after a period of calm and rebound, financial markets may once again turn volatile if economic growth continues to slow.

With no data on the docket today, the FX markets will take a cue from equities which have enjoyed a very strong rebound at the start of the year. But with stocks having rallied so much so fast some profit taking may be due and if equities begin to selloff they could drag USDJPY to 109.00 as the day proceeds.

Boris Schlossberg
Managing Director

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