FX Update: USD under siege on Trump’s belligerence

• Trump's inaugural speech loudly proclaimed protectionism.

• Some Trump policies are dollar-supportive, others USD-negative.

• Trump likely to get aggressive on other countries' FX policies, most notably China.

• We see 1.0800-50 as critical for EURUSD on perhaps a weekly closing basis.

• USDJPY remains the highest beta play on USD's direction.

President Trump’s inaugural address was one for the ages, as he took an aggressive tone against the Washington establishment and announced an "America First" priority that loudly proclaims protectionism will be the president’s chief priority in the coming months. 

There are two sides of the protectionist coin: on the one hand, many of the policy measures that have been floated are highly US dollar-supportive, as policies like the border-adjustment tax would likely lead to a powerful reduction in the US trade deficit, and the more the US reduces its current account deficit in general, the higher the risk of an offshore USD shortage. Reshoring of some industries and domestic investment on corporate tax breaks could be another source of large US dollar inflows. On the other hand, the less USD-supportive scenario would be a global trade war with a less than zero-sum game as other countries would retaliate, and that seems to be at the heart of the current unease. Furthermore, some see Trump getting aggressive on other countries’ currency policies, most notably China, posing a risk of a new and higher-stakes chapter in the global currency wars. 

In any case, technicians now have to busy themselves deciding where the “final” lines in the sand are for the USD and whether the currency remains in a secular uptrend. We’ve declared the 1.0800-50 area as critical for EURUSD on perhaps a weekly closing basis, if not daily. For USDJPY, there is a bit more leeway for this consolidation to extend, but the 110.00-112.00 zone looks important. Note the Ichimoku cloud support in the chart below.

Sterling is on a roll here, likely in part due to the USD’s suffering, but we’re seeing some follow-through from the post-Brexit speech move last week. Prime minister Theresa May has outlined a new economic revival plan aimed at rebalancing the UK economy and investing more in education and infrastructure.  She will deliver a speech today, and tomorrow will bring the Supreme Court’s ruling on Article 50 and whether it can be invoked without parliamentary involvement, though there is new lack of suspense on that front after May's speech promised to involve parliament in the Brexit process.

Highlights on the economic calendar for traders this week include quarterly CPI figures from Australia on Wednesday and New Zealand on Thursday. These are interesting tests of the recent torrid rallies in the Antipodean currencies, which have been the darlings among more liquid currencies on the theme of global reflation. We’re skeptical on Australia’s economic potential and suspect both currencies could be vulnerable over these reports.

 

USDJPY beta play

The local recent lows are still intact here for USDJPY at above 112.50, but if we continue to see consolidation on further bond market strength and retrenchment in global risk assets, this could see the pair poking toward lower supports. If we take the daily chart, the ultimate local support is perhaps the Ichimoku cloud bottom near the also psychologically important 110.00 level. We prefer for strong support to come back in at some point for a test back to the top and beyond.

 

The G-10 rundown

USD – we’re entering critical territory for the US dollar here as we bump up against the final supports for the greenback that maintain its secular uptrend. Perhaps the pivot will arrive this week or with next week’s FOMC meeting, even if there is little anticipation surrounding the latter.

EUR – the aggressive euro rally is beginning to look overdone and we prefer to believe that EURUSD will find a ceiling soon, but need a quality technical reversal to get bears involved.

JPY – the yen has its eyes on interest rates above all else, and most JPY crosses are still trading within recent ranges because yields have also consolidated after their recent run lower. As the speculative intensity is highest in bonds on the global reflation theme, the yen is likely to remain one of the most volatility currencies.

GBP – GBPUSD has cleared a local resistance level above 1.2400, but the bigger psychological level is perhaps 1.2500 ahead of the key 1.2800 area. EURGBP is pressing a bit lower as well today, and if EURGBP can break down through the 0.8600 area, it will begin to confirm a broader sterling reversal.

CHF – parity has fallen in USDCHF, though without notable moves in EURCHF, this is mostly about USD weakness. Note that 0.9950 was often an area of resistance on the way up.

AUD – The Aussie has wilted in the crosses, especially versus the yen to start the week as global unease over Trump’s protectionist rhetoric has seen a downshift in global growth/reflation enthusiasm.  The key test for the AUD this week is Wednesday’s quarterly CPI number as Australia has been posting its lowest CPI levels for the cycle in recent quarters.

CAD - The loonie is bouncing after its sharp run lower on the surprisingly dovish Bank of Canada meeting last week. We like the range in USDCAD to hold on this development, and we’ll look for tactical levels for getting long in the days ahead.

NZD – the kiwi is matching the Aussie’s strength as the AUDNZD rally has stalled out, with the next test on this week’s quarterly CPI releases from Australia (Wed.) and New Zealand (Thur.).

SEK – watching whether SEK can pick up further momentum against the euro as the policy momentum from the Riksbank shifts toward reducing monetary accommodation. The 9.50/9.4750 area is structurally pivot for EURSEK.

NOK – oil has been stuck in a range for nearly two months, leaving little to go on here as Norges Bank isn’t rattling its cage on policy. Upside for the NOK likely requires a return of the reflation theme with participation from the energy sector.