The Pied Piper – When Trump Plays, the Markets Follow

Central banks over the world have raised their concerns over a possible imposition of trade tariffs on China in particular and the cause of concern is certainly justified, the effects on both the U.S and global economy expected to be a negative, as Obama discovered early in his 2-terms.

It’s not just the trade tariffs that are sending shivers through the markets, it’s also the prospect of protectionism policies that are likely to lead to a jump in U.S inflation, resulting in the need for the FED to shift its rate path projections to counter.

The global economy has certainly benefitted from the low interest rate environment since the Global Financial Crisis, cheap cost of funds having supported the economic recovery. The issue going forward, assuming the U.S administration does deliver on the remaining campaign pledges, is that borrowing costs will see a material increase, not just in the U.S, but overseas and we are all too aware of China’s ballooning debt at corporate level and they are not alone.

As we wrote in yesterday’s report titled ‘Harker Trumps Trump on the Dollar – The Real Currency War’, the administration’s desire for a weaker Dollar brings into question just how aggressively the government will roll out fiscal policy measures. As things stand, it looks as though it will be a slow cook to rebuild America, which does alleviate some of the pressure for now.

This takes the markets back to foreign policy. News hit the wires overnight of a letter being sent by Trump to the Chinese Premier, the U.S President calling, in writing, for a constructive relationship with China, one that benefits both China and the U.S.

The news is certainly a positive for the markets, the U.S President having spent much of his campaign and first few weeks in office looking to sledge China and, as the markets look ahead to Japan Prime Minister Abe’s visit tomorrow, there will be a sense of optimism ahead of the meeting, assuming the U.S president doesn’t change his tune.

Markets have responded in kind, the Dollar finding support off the back of ‘The Letter’ and on sentiment towards tomorrow’s meeting, leading to an easing, not only in the Yen, which is up 0.24% at ¥112.21 against the Dollar, but also gold, which continue to rise 0.43% to trade at 1244.85 going into the European session.

Granted, the moves are certainly not material and it’s not surprising, the U.S administration having flip flopped before, but it’s a step in the right direction and are likely to see further moves in favour of the Dollar through the European and U.S session, though there will need to be some caution ahead of the jobless claims release, the markets having been able to take the release in its stride for quite some time.

Market dynamics have taken a more logical path towards the European open, the EUR and pound under pressure through the Asian session, up 0.08% at $1.0708 and cable up 0.23% at $1.2572 going into the European session, geo-political risk and concerns over Brexit continuing to weigh on the respective currencies.

The day ahead will be key for the markets, despite material macroeconomic data out of the U.S being limited to the weekly jobless claims figures, noise from the Oval Office ahead of tomorrow’s meeting between Trump and Abe likely to be interpreted by the markets on the position Trump is to take with Japan and trade and let’s not forget the political issues between Japan and China, which is likely to be discussed.

While the markets will be more focused on foreign policy, FOMC member Bullard is also scheduled to speak this afternoon. Bullard has yet to support a 3-rate hike forecast for the year, so anything hawkish will provide the Dollar with further support, though as a non-voting member, the moves are unlikely to be as material as on Tuesday, voting FOMC member Harker having given the Dollar a nudge.

At the time of the report, the Dollar – Yen stood at ¥112.20, the Yen up 0.23%, with the EUR flat at $1.0708 and up cable 0.23% at $1.2572, as risk appetite sees an improvement despite the headwinds in Europe, leading to a recovery with European equities kicking off the day in positive territory, though we expect the day to belong to the Dollar.