Head of FX Strategy
Summary: US President Trump is pulling out all of the stops to mobilize support for the markets and the economy in what looks like a near panic. Meanwhile, the USD looks set to break higher and the Fed will have a tough time in delivering enough to stop it.
Trading interest
Trump has lurched into panic mode if we are to judge from yesterday’s remarkable string of developments. Sources in the White House suggest that the administration is readying a payroll tax cut as a relief measure if growth shows signs of faltering – sheer insanity, given the momentum in rising deficits already in place from Trump’s prior tax cut round. Other stories circulated that the White House is studying whether there is a way to cut capital gains tax without Congressional involvement (surely unconstitutional?), and that Trump thinks data are purposefully being manipulated to make him look bad. The peripatetic POTUS also took to Twitter to lambaste the Fed and say that Powell should cut 100 basis points and “perhaps [add] some quantitative easing as well.” The Fed will get there, but at what pace? Somehow, the market thinks there are only 18% odds that we see a larger than 25 basis point cut through the September 18 FOMC meeting. If the USD breaks higher here and holds, this should quickly be adjusted to 50 and raises the risk of a between-meeting cut.
The consolidation in bond markets has only been noticeable at the longest end of the curve, and has hardly impressed. Nor has it yet pressured risk appetite in equity markets, though we are seeing signs of nerves across emerging markets, likely in part due to the stronger US dollar and China setting the USDCNY fix at a new high for the cycle, while USDCNY was allowed to touch the cycle highs overnight. As is often the case, what was formerly most popular across EM is now quite weak – USDRUB is up almost 5% since the July 31 FOMC policy mistake, USDZAR is up around 7%.
It is clear that the Fed will have to deliver and deliver big to turn around the momentum developing in the US dollar – is Powell ready to hint that the Fed will submit to the forces that will eventually force the Fed’s hand anyway (cut to zero and massive QE) or will he continue to dither? The stakes Friday are high.
Chart: USDCAD
USDCAD is backing knocking on the key resistance above the 200-day moving average and around recent highs. The economic calendar is also interesting over the next couple of sessions for Canada, as Manufacturing Sales for July are up today, and the important July CPI release is up tomorrow. A close above the resistance here with a backdrop of USD strength could quickly see the pair poking to the top of the range above 1.3500. Note the descending trendline as well.
The G-10 rundown
USD – Powell has a tough task to deliver in sufficient size on Friday to hold the USD back. Interesting to note that Trump’s panicky pressure in all directions doing nothing to hold back the greenback either. USD breaking up significantly and/or new local lows in US equities would likely usher in a between meeting 50 basis point cut.
EUR – high stakes for the EU’s leadership as European banks are in a death spiral – the ECB will have to bring out the big bazooka at the September 5 meeting. G7 may offer hints on the temperature of US-EU relations as well. If USD breaks higher versus EUR, we should shield our eyes for Trump policy mobilization against the EU on the trade front.
JPY – yen holding well here and prospects for a broad rally reinvigorated by EM weakness and any return of broader risk off. CADJPY downside an interesting way to express JPY strength.
GBP – Boris wants the Irish backstop abandoned and sterling will have a hard time finding support until/unless the EU gives way.
CHF – consolidation was hardly worth writing home about – EURCHF looks heavy for plumbing further depths until the EU gets ahead on the policy front and Brexit damage is averted. SNB’s intervention gathering pace as per yesterday’s weekly sight deposit data (nearly CHF 4 billion)
AUD – the RBA minutes mildly supportive, as the RBA hopes that infrastructure spending, easing in the bag and tax cuts will offset downside risk to the economy. But at the same time, the RBA clearly ready to swing into gear with QE if the Aussie economy falters.
CAD – note USDCAD chart above – key here for whether CAD plays some downside catch-up are the next couple of Canadian data releases.
NZD – AUDNZD trade creeping and crawling higher – supported by RBA minutes. NZDUSD looking heavy toward those multi-year lows.
SEK and NOK – the NOK putting in a modicum of strength here (but vulnerable again if risk appetite rolls over), while SEK suffering with the EUR and negative yields.
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As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
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