- Investor risk appetite supported by expectations of the president-elect's massive $1trn fiscal spend and amid expectations that OPEC will agree to a production cut
- A more pragmatic Trump significantly decreases the uncertainty risk which has kept the USD trade well bid
- VIX has fallen to its lowest levels since August as US real yields surges have stalled, suggesting that USD demand could be limited moving forward and remain at this current level against EUR until the Fed meeting
- With December rate hike fully priced in we do not see FOMC minutes proving much of a boost for the USD as only a surprise could prevent the Fed from normalising interest rates
- UK: As the reliance of fiscal support limits the need for further BoE monetary policy measures GBPUSD is trading sideways. Heading into the US holidays traders should watch out for a test of 1.2400 for an opportunity to buy the bounce to 1.2599
- AUDUSD traders should watch for further recovery to 0.7486. Oil prices slid but remain firm on growing expectations for an OPEC deal
- We remain skeptical of any meaningful production cut and would sell oil on rallies
Equity markets are still supported by U.S equities reaching a record closing high for the second straight session. Investor appetite for risk is been supported by expectations of the president-elect's massive $1trn fiscal spend and amid expectations that OPEC will agree to a production cut. In addition, markets were encouraged by the New York Times interview where Trumps appears to have tempered portions of his more conversional views. A more pragmatic Trump significantly decreases the uncertainty risks which have kept the USD trade well bid. Interestingly, VIX has fallen to its lowest levels since August as US real yield surges have stalled, suggesting that USD demand could be limited moving forward. Asian regional equity indices were mostly in the green with the Hang Seng up 0.4% yet the Shanghai composite fell 0.22% (Tokyo holiday kept trading volumes light). The USD remains supported as US bond yields firmed. Only the AUD was able to meaningfully gain against the greenback. In subdued trading, AUDUSD continued its bounce off the 0.7311 low rallying to 0.7445. In recent sessions the AUD has been able to benefit from surges in Dalian iron ore prices and aspects of yield seeking behavior. AUDUSD traders should watch for further recovery to 0.7486. Oil prices slid but remained firm on growing expectations of an OPEC deal. We remain skeptical of any meaningful production cut and would sell oil on rallies.
We caution traders not to get too stuck into the current growth and inflation speculation of a President Trump, as policy are far from detailed or finalized. The current rally is making substantial assumptions on the size of the US fiscal stimulus package (supporting monetary policy) and effects on economic data. What is known for certain is that Trump is a volatile character who’s policy platform can shift suddenly. In addition there is growing push back in congress of proving trump with a blank check for budget expansion.
In the UK, the Autumn Statement should see the Chancellor of the Exchequer Hammond diverging from the current fiscal framework towards a policy with additional flexibility. The move is seen as a response to Brexit and the effect of dynamic economic conditions. The Treasury should acknowledge the greater deficit following the EU referendum but will not propose fiscal spending just yet. However, there is a limited probability of an announcement of prolonging fiscal austerity. For the GBP the adaptive policy should be viewed as a positive since it will provide policy makers with the fiscal stimulus response needed to handle any shock, while the reliance on fiscal support limits the need for further BoE monetary policy measures. GBPUSD is trading sideways and heading into the US holidays, traders should watch for a test of 1.2400 (21d MA) for an opportunity to buy the bounce to 1.2599 (55d MA).
Finally the Fed minutes will be released with expectations for the report to signal further comfort with a December 25bp rate hike. The incoming US data including the strong rebound in October durable goods orders should provide members additional support. Yet with the December rate hike fully priced in we do not see the minutes proving much of a boost for the USD. Michigan sentiment data will provide a view on how the consumer is holding up post Trump's election.
Yann Quelenn, market analyst: What to expect from FOMC minutes: “Tonight’s release of the Fed’s October meeting minutes should not have any impact on dollar valuation. A December rate hike is fully priced in by markets and only a surprise could prevent the Fed from normalising interest rates.
What really matters to us at this point from the minutes is inflation. Since Trump's election, inflation expectations have really picked up, which is in line with our view of growing inflation in 2017. We just recall that core inflation (CPI without food & energy prices) is above the Fed’s target for the last 12 months.
The Fed should maintain their hawkish view, even next year and we believe that it is very likely that we will see the Fed widening the spread between nominal and real interest rates in order to kill the country’s massive debt.
Data-wise, October core durable goods orders will be released and are expected to rise 1.7% m/m. This increase is however attributable to aircraft orders and so may only be temporary. For the time being, the dollar should remain at this current level against the single currency until the Fed meeting. By then, speculations about next year's monetary policy are likely to start.”