A Trainwreck waiting to happen
The sheer volumes of political noise, Trump uncertainty, and central bank musings has ground down investor sentiment in this battle-worn week for the currency markets. Despite all the noise overnight, the overall impact has been relatively mute, in spite of surging volumes with the ECB fall out, which generated the lion’s share of the day trader volume. On the broader spectrum, longer term players were reluctant to aggressively test the water as restraint upstaged bravado in this extremely muddled landscape.
Political Front
NAFTA remains an extremely touchy topic and despite Trump’s about face, I suspect we have not heard the last word on this subject. The Canadian dollar underperformed the rest of the commodity currency bloc due to lingering trade concerns and another slide in WTI.
The Stop Gap bill appears stuck in the mud as the Republicans, despite controlling the majority in both house and senate, are again and again relying on the Democrat vote as the Conservative hardliners are in constant opposition to even the most common sense spending proposal.
As for Obamacare, well that only adds to the confusion as it remains uncertain whether Speaker Paul Ryan will bring a revised health care reform bill to Congress for a vote today.
Central Banks
ECB: Draghi focused on the unchanged inflation landscape; short-term interest rates buckled and the EURO slid to an overnight low of 1.0855.
BOJ: At some point, the BOJ is expected to slow the pace of JGB purchases, but with inflation remaining stubbornly below 2%, we are still a bit off from that time. While currency concerns are not within the BoJ overall purview, but the Yen’s near to medium term tangent will likely be determined by interest rate differentials. The BoJ will be doggedly cautious to avoid any language that could be confused as an adjustment in monetary easing.
Australian Dollar
The plethora of headlines generated by the Trump administration has produced very choppy trading in the Commonwealth currencies. Commodity currencies were again dragged through the mud as the AUD hit a four-month low, trading in sympathy with the Canadian Dollar as the US protectionist viewpoint continues to rear its ugly head. Whether it’s softwood lumber, aluminum or take your pick, it looks like downside momentum could carry on, as the fears of US protectionism are not leaving the airwaves anytime soon.
Japanese Yen
Expect a headline driven trade to dominate, as both the Healthcare train wreck and Stop Gap debacle fill the airwaves. Look for short-term gaps and quick nature liquidation to continue, but as trader headline fatigue set in, level heads may opt for the sidelines.
