Trump Pins back the USD, will the FED do the same?

Earlier in the Day:

Economic data out of Asia this morning was on the heavier side, with Japan’s December industrial production, Australia’s 4^th quarter inflation figures and China’s January private sector PMI numbers out this morning.

According to prelim numbers out of Japan, industrial production surged by 2.7% in December, coming in ahead of a forecasted 1.6%, with production rising by 4.2%, year-on-year. The better than expected figures came off the back of strong overseas demand, while domestic demand continues to lag ahead of the spring wage reviews, where hopes are for some meaningful increases to support much needed consumer spending in Japan.

Then Yen moved from ¥108.731 to ¥108.787 upon release of the figures, with forecasts being for a 4.3% fall in January and a 5.7% rise in February, the choppiness coming from the lack of domestic demand and intermittent overseas orders that the Japanese economy has become dependent upon.

For the Aussie Dollar, there was some respite from the recent gains, with 4^th quarter inflation disappointing. Unsurprisingly, the Aussie Dollar took a tumble on release of the figures, with soft inflation continuing to be one of the RBA’s reasons to hold steady on policy over the near-term.

It wasn’t all doom and gloom on the consumer price front, with upward pressure coming from transport (+2.4%), driven by a 10.4% rise in automotive fuel prices; an 8.5% rise in tobacco prices; a 6.3% jump in domestic holiday travel and accommodation, together with a 9.3% rise in fruit prices.

The softer numbers were ultimately attributed to a 1.7% fall in international holiday travel and accommodation; a 3.5% fall in audio visual and computer equipment and a 1.4% fall in telecom equipment and services, according to data provided by the Australia Bureau of Statistics.

The Aussie Dollar moved from $0.80990 to $0.80757 upon release of the figures, with December private sector credit also coming in below expectations, rising by just 0.3% compared with a forecasted and November 0.5% rise.

If the markets were looking for another reason to hit the sell button this morning, China’s January manufacturing PMI also disappointed, with the PMI easing from 51.6 to 51.3, falling short of a forecasted 51.5.

The softer numbers are expected to continue through the winter months as the government crackdown on polluting industries weighs on output, with this morning’s figures being for the larger companies and SoEs.

In response to the numbers, the Aussie Dollar moved from $0.80677 to $0.80631.

While the data was on the heavier side, it ultimately came down to Trump’s State of the Union speech given during the Asian session.

The U.S President managed to stick to the script in a close to 90-minute speech, which saw the Dollar ease back, with the President holding back from any mention of Dollar strength. U.S protectionism and trade were amongst the main topics, while Trump also broadcasted the significant improvements to the U.S economy that would have been financial market friendly.

At the time of writing, the Aussie Dollar was down 0.05% to $0.8079 and, with the Yen down 0.06% to ¥108.85%, the Asian equities markets were in recovery from early losses as Treasury yields eased back in the early part of the day.

The Day Ahead:

Economic data out of the Eurozone this morning includes Germany’s December retail sales and January unemployment figures, prelim January inflation figures out of France, Spain and the Eurozone, together with the Euro bloc’s December unemployment rate.

Following some disappointing inflation figures out of Germany, this morning’s numbers could be quite telling, with any pull back likely to ease some expectation on the ECB shifting on policy towards interest and deposit rates.

The sudden surge in government bond yields this month has come off the back of an expected shift in policy expectations for the coming year, which has contributed to the equity markets taking a hit this week.

In spite of the 10-year U.S Treasury yields hitting a 4-year high, the EUR has managed to stand its ground and that’s largely because of market sentiment towards ECB monetary policy and Eurozone economy, contributing to the jump in Germany’s bunds since the start of the year, and the EUR’s position as a funding currency that leads to gains during periods of market volatility.

Economic data out of the U.S was positive on Tuesday and, while the EUR has gained more than 3% year-to-date, perhaps the ECB’s calmness over the EUR rally is in the fact that the general consensus is that the market has got it wrong.

At the time of writing, the EUR was up 0.19% to $1.2425, with today’s stats and further response to the State of the Union speech the key drivers through the day.

Across La Manche, yet another day of reflection for the Pound, with no material stats scheduled for release. There’s been a little bit of anxiety in the Sterling this week over renewed fears that British Prime Minister Theresa May will be forced out of office. The negative sentiment towards UK politics certainly contributed to the Pound’s fall from $1.42 levels to $1.40 levels at the start of the week, before a Tuesday recovery.

BoE Governor Carney will have contributed to the Pound’s gains on Tuesday, with Dollar weakness also returning late in the day and ahead of Trump’s State of the Union speech.

There’s plenty for the markets to be focused on when it comes to the Pound and that’s likely to keep volatility on the higher side over the near-term.

At the time of writing, the Pound was up 0.25% to $1.4182, with Brexit chatter and the Dollar the key drivers through the day.

Across the Pond, it’s a horror show for the Dollar, with positive economic data doing little to restore confidence.

There’s so much uncertainty surrounding the Dollar that the market is just unwilling to make a call and looking at where the Dollar is today, it certainly looks oversold.

Economic data out of the U.S this afternoon includes January’s ADP nonfarm employment change numbers and Chicago PMI numbers, together with December’s pending home sales.

Whilst we will expect some market response to the data, particularly the ADP numbers, it’s all about the FED tonight and whether the FOMC statement will reflect a more hawkish or dovish tone. It’s Yellen’s last hoorah, so she will be looking to leave the markets intact, that’s for certain.

The Dollar Spot Index was down 0.13% to 89.041 at the time of writing, with the State of the Union speech easing some of the market angst.

For the Loonie, November GDP and December RMPI figures are due for release, with the forecasted uptick in GDP numbers likely to support the CAD, though how far the markets will be willing to go remains to be see, with NAFTA talks yet to have concluded.

The Loonie was up 0.18% to $1.2314 against the U.S Dollar, with plenty of land mines in the day ahead to drive the pair through to the close.