USD: Less protectionism? – Rabobank

According to Jane Foley, Senior FX Strategist at Rabobank, expectations that USD bulls would celebrate Friday’s departure of Steve Bannon from the White House are already being pared back. 

Key Quotes

“Bannon is a strong advocate for protectionism and trade confrontation, subsequently news of his exit is a relief to those concerned about the impact of the current White House Administration on free trade.  However, it can be argued that Bannon’s departure may not alter the course that the Administration is steering dramatically. Bannon’s demands for a US exit from Nafta have already been watered down into a renegotiation.  Also, calls for a national security probe of steel imports have stalled amid widespread opposition.”

“Even if there is still support for the view that Bannon’s removal from the White House may result in a less confrontational style on trade policy in general, the start of the joint military exercises between the US and S.Korea yesterday provides a good reason for risk appetite to remain in check and for USD bulls to be subdued.”

“Recent events have shown the USD to be sensitive to tensions between President Trump and Supreme Leader Kim Jong-un.  The reduction in tensions at the start of last week triggered a modest revival in the tone of the greenback.  Yeserday, until August 28, the US and S.Korea will hold their annual joint sea, land and air exercises which will involve tens of thousands of troops.  This is an annual event named Ulchi-Freedom Guardian which has in the past antagonised the N.Korea leader, not least because the reported trial “decapitation strikes” against Kim Jong-un and his top generals.  Given concerns that Pyongyang could respond to this week’s exercises, in all likelihood, demand for safe haven assets is likely to remain firm in the coming days and the USD could find itself on the back foot vs. the JPY and the EUR.” 

“Despite the geopolitical clouds, the timing of the Fed’s Jackson Hole event (August 24-26) suggests that the markets will have to keep one eye on central bank policy over the coming days.”

“Last week’s release of the minutes of the July FOMC indicated that several policymakers were concerned with the lack on price pressure in the US economy.  This supports our view that the Fed will leave rates on hold through to the end of the year.  The market is hoping for further insight into the Fed’s thinking on both rates and the timing of balance sheet reduction.  Also notable will be the appearance of ECB President Draghi at Jackson Hole.  That said, reports that he will not be proving fresh policy clues has downplayed the importance of this event for the EUR.   Ahead of the Jackson Hole event, we expect further consolidation around current levels in EUR/USD though we forecast EUR/USD at 1.20 by the middle of next year.  Apprehension about a possible response from N.Korea is set to keep the safe haven yen well bid near-term.  The April low near USD/JPY108.13 is likely to offer support.”