President Trump: The big flip
(by Arnaud Masset)
The Donald has been acting up once again as he reneged on one of his key campaign promises. The US Dollar and Treasury yields tanked on Wednesday after President Trump told the Wall Street Journal that he won’t label China a currency manipulator.
He also declared that that the Dollar “is getting too strong” and shifted his position on Janet Yellen’s future as he left the door open for her renomination.
EUR/USD rose as much as 0.75% as it hit 1.0678 during the Asian session, while the Australian Dollar, the best performer over the last two days, jumped to 0.7596, up 1.30% from Wednesday opening.
On the Treasury side, two-year yields reached 1.20%, down 3.5bps on the session, while the 10-year fell 8bps to 2.22% - the lowest level since mid-November last year.
In case you were still having doubts about the reliability of the US President, a clear pattern has emerged and the market is slowly pricing it. Indeed, the odds that President Trump does even half of what was promised are converging towards zero.
The reflation trade has already started to slowly deflate as investors realised it was just blowing smoke. We expect higher yielding currency to continue extending gains versus the Dollar, while the single currency will see minor gains against the backdrop of political tensions in Europe.
Fundamentals back in Asia
(by Peter Rosenstreich)
In the Asian session, South Korea’s central bank held interest rates at 1.25% as widely expected. In a slightly less dovish, cautiously optimistic, communique, the bank upgraded its growth outlook and inflation data.
The shift in bias combined with a general rise in risk appetite triggered strong South Korean Won demand. In regards to the USDKRW, the central banks noted that geopolitical risk could further affect KRW movements and the low probability of President Trump naming South Korea a currency manipulator.
In Singapore, despite slightly hawkish expectations, the MAS held its policy strategy and forward unchanged. The disappointment sent USDSGD marginally higher for a short time before quickly retracing.
Finally, in Australia, the RBA provided its semi-annual financial stability review. There was nothing evolutionary in the report with a focus on expansion of household credit. The bank concluded that macro-prudential measures and supervision would keep leverage contained.
Elsewhere, Australian fundamentals continued to provide positive developments. The AUD labor markets saw job growth rise to 60.9k vs. 20k expected, while March's trade balance with China saw exports surge 16.4% vs. 3.4% expectation.
A strong positive for Australia, global economy imports expanded 20.3% (commodity imports are a significant driver of import demand). Yet without appreciation in key commodities such as Copper and Iron Ore, AUD will have a hard time rationalising a sustained bullish rally. We remain bullish on Emerging Markets FX in spite of temporary headline-fueled risk aversion.