The FX Trader: Trump turbocharges USD drop ahead of FOMC.

What to know

President Trump was out with a number of statements late Tuesday suggesting the administration is happy to see the greenback weaker. Trump indicated that he thought the recent US dollar decline was “great”, but that “I could have it go up or go down like a yo yo”. He also complained about China and Japan’s currency, saying the two countries “always want to devalue”. This is typical of Trump’s style and certainly worth a reaction, even if it most likely not an intentional set of remarks aimed at moving the market.

The comments coming in less liquid trading hours on Tuesday saw an exaggerated initial move in the USD lower – taking EURUSD all the way to 1.2081 in a spike, for example, before the action was corralled and the price shifted back to hover close to 1.2000. It all feels a bit much a bit fast but the trend is the trend here after the high momentum breakout above 1.1900+. Looking at relative valuations across the major currencies, the focus should be more on USDJPY than on EURUSD, as the euro is not cheap – but considerable uncertainty in JPY pairs until the other side of the February 8 election.

We have an FOMC today – but I have no angle on how this moves the market – we have a lame duck Fed Chair Powell and we are awaiting Trump’s Fed Chair nomination any day – now considered likely to be Blackrock Fixed Income head Rick Rieder.

There are at least three drivers of current and possibly further USD weakness:

• Shift to fiscal dominance. One is the anticipation of a dovish new Fed Chair appointment to replace Powell in May, an announcement that could happen any day now. The actual ability of a new Fed chair to get the FOMC to lower rates as aggressively as he or the Trump administration want is doubtful in the near term no matter the identify of the new Fed Chair. More important is the ongoing and gathering decline Fed independence theme as the new “national capitalism” strategy of the Trump administration represents a return to a war-economy like fiscal stance, with industries and sectors of the economy that are key to national security likely to get easier credit and effective policy rates than other sectors. The Fed policy rate is not particularly relevant if you have the know-how and intent to produce critical materials, for example.
• The “Sell America” trade. This has been sparked by the Trump administration’s aggressive posturing against traditional allies, from Canada to Europe, which has awakened a popular resistance among investors against holding US assets and even a shift in more institutional and government attitudes toward the same. There have been stories discussing Canadian official pension allocations as overly US-focused in their allocation and the same for Europe. This has enormous implications for the greenback, though many will point out that the size of US capital markets are a function of its serving as the world’s reserve currency and that other markets will have trouble absorbing significant investment flows. Still, a narrative is a narrative if it incites flows at the margin and speculative positioning likewise. Note the move in NOK yesterday after a government-appointed advisory panel made sharp comments on the need for weighing geopolitical risks (more below under NOK).
• Signs that the US is happy to have a weaker US dollar. Part of the touted “Mar-a-lago accord” framework as laid out by current temporary Fed Governor Stephen Miran is to weaken the US dollar to make US exports more competitive and force other powers to pay for the privilege of using the US dollar as the global reserve currency rather than having the currency itself absorb excess strength. This sense that the US wants to leverage a more strong-arm approach on USD policy reinforces the “Sell America” trade. Conviction that the Trump administration is happy to see a weaker US dollar deepened on Friday, when the New York Fed “checked” the USD/JPY exchange rate, a sign that the US was happy to lend Japan a helping hand in propping up its currency.

Chart focus: EURUSD
A couple of comments on the EURUSD chart as I have covered USDJPY so extensively of late. The break above the key 1.1900 level certainly points higher, but looking across currencies, the euro may prove a sluggish performer and may not be the best expression against the USD to express a view of dollar weakness. Let’s see if 1.2000 proves sticky after this rather brutal move relative to the prior quiet – certainly we need to maintain the 1.1900 area as support to keep the focus higher for now. The next area higher will naturally be something like the 1.2500 level if broad USD weakness continues – there are two major past EURUSD highs since 2014 – the late 2020 peak of 1.2349 and the early 2018 peak of 1.2555.