The Daily Reckoning UK

Trump Declares War On Dollar

Tom Tragett

by

Posted 1st February 2017

Yesterday the dollar took a hit following comments from the US president who first took aim at Germany and then later on, at Japan and China. He basically accused all three countries of ‘manipulating’ their own currencies to ensure a strong dollar.

Whilst he clearly has a point in regards to China and Japan, I think the accusation aimed at Germany is not fair and Merkel reposted very quickly to his comments with her usual diplomatic aplomb.

So the dollar got beaten up yesterday, but perhaps more so because it was the last day of the month and we know there was a good chance of some USD sell orders showing up. Well, I think there was demand in that direction and these comments simply exacerbated the moves.

The weaker dollar and falling equity markets all fell nicely into the lap of gold which benefitted from the combination of risk aversion and a lower dollar. Somewhat surprisingly though the price topped out at $1215 yesterday and didn’t take out $1220- more of the same recipe today and perhaps it might?

So the EURUSD eventually took out 1.0800 for the first time this year as the USDJPY later took an even bigger hit, dropping through 112.50.

So the US president has declared a currency war on China, Japan and Germany!

Now the AUDUSD also reacted to the move lower in the USD, but thankfully there was no mention of Australia by Trump. Therefore, the move higher in the price stalled at 0.7606, endorsing what I said when we first entered the trade; about the AUD being under the radar in this respect- more on the AUD in a minute.

We have important economic data from the UK, Europe, and the US as well as the UK Brexit vote and then later the FOMC policy decision at 7pm tonight.

So there’s a lot of potential moving parts today folks. The biggest mover overnight has been the NZD which has fallen sharply following a very disappointing unemployment report there; rising to 5.2% in Q4 from what was an expected 4.8% read- that’s one heck of a miss and explains why the NZD has taken a hit across the board.

That has also impacted the AUDNZD which is back above 1.04 after nearly reaching 1.03 yesterday. Somewhat annoyingly, if the AUDNZD was around 1.0320 this morning, then the AUDUSD would be underneath 0.7500 as opposed to actually outperforming both its commodity cousins; the CAD and the NZD so far this morning.

The UK parliament will vote on Brexit this evening. I don’t think many people expect that not to go through the house. All the same, clearly there’s a potential impact trade there in terms of the pound which I am still focusing on this morning.

The Asian equity markets have shrugged off the negative European and US closes yesterday and the weaker JPY has certainly helped the Nikkei. The fact that a whole host of Japanese officials came out overnight and refuted DT’s remarks does rather smack of ‘Methinks the lady doth protest too much’!

Look we know that both the Japanese and the Chinese are guilty as hell, but no one recently has ever really pulled them up on it; certainly not the Obama administration. However, and as we know DT isn’t a man to mince his words and he will call it how he sees it and he will surely not back down-ergo currency wars folks.

The question is who will win on all this? Perhaps it’s a bit early to tell as right now all we have is a salvo of warning shots. However, I do think that DT would do well to remember just who’s bankrolling a significant part of the US debt right now. One thing is clear that beyond the USD, JPY, EUR or the CNY, it’s the GBP that’s winning this global war and I do expect that to continue in the months ahead.

Now yesterday HSBC sent out a trade recommendation to sell the GBPUSD at 1.2540 with a stop at 1.2810 and a target of 1.2000. Whilst I don’t necessarily disagree with that prognosis, the immediate problem is the generally lower dollar has potentially thrown a spanner into that trade idea.

That’s because the USD index posted its lowest close of the year yesterday and that monthly close below 100 cannot be considered as technically positive. However, having looked at this one in detail I think there is a chance that we could see this one fall even further, towards 97.75 from here.

Of course that’s some way off from the current levels and if reached would imply a move to above 1.10 on the EURUSD. So unless the EURGBP can move back above 0.8800 again then maybe, and I stress maybe, the GBPUSD could remain supported because of that lower dollar.

Of course in the midst of all this is the prospect of how the French elections will play out and how that could dramatically impact the EURUSD. Of so that’s a few months in the future in early May. More immediately tonight we have the US FOMC policy decision due at 7pm. So what will they deliver tonight?

No one expects any move this time as it’s probably way too soon for another rise after last month’s move? The other issue is what if anything the Fed will say about the dollar.

Beyond that immediate prospect the problem for Trump and his protestations is that he simply cannot embark on such fiscal expansion and not expect the dollar to rise at the same time- it’s simply not possible unless its major counterparts embark on similar policies at the same time.

So there we have it; quite a conundrum in the short term. What I think we can expect, certainly today is more sharp moves, more volatility and more sporadic price action at times which is going to just as tough to navigate as it has been most recently.

In terms of the GBPUSD, I can see another of those interim double formations (in this case a top not a bottom) in place around 1.2600 and a break above there now could warn us that we will take another run at the recent highs and beyond- maybe to that 1.2775 level again.

That is a difficult one to call as I earlier said, but I am keeping a very close eye on this. For anyone who is in any doubt my longer term view of a move to parity on this one is entirely unchanged; it’s just a question of when and where we sell not if!

This morning though the latest UK manufacturing PMI data at 9.30am might have a more immediate impact on this one, but beyond whatever that throws up, we do have the Fed and the House of Commons to possibly deliver a wider move on both the GBPUSD and the EURGBP.

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