Traders that have been getting worked up by the impact of “risk on, risk off” are now having to get used to this morphing into “Trump on, Trump off” (as dreadful as this sounds). You even have some expanding this with “Trumpflation” and “Donald down”, but this will be the final time you hear these terrible terms on these pages. Anyway, Donald Trump continues to have a significant impact on market sentiment across financials with forex and commodities especially driving off moves on Treasury yields and the dollar. With a light economic calendar this is likely to continue this week.
Donald Trump has ramped up the protectionist rhetoric in the past week, accusing key trading partners (Germany, Japan and China) of using currency devaluation to transfer growth out of the US. As I wrote my piece last week, the markets had been fairly undecided on whether Trump would be pursuing a dollar weakening policy, however this has now shifted. There is now a clear dichotomy between the impact of Trump’s protectionism and the Fed’s tightening cycle and it will be a drag on dollar strength (even if it fails the sustainably reverse it). It will impact across forex markets and commodities and will make forecasting move increasingly difficult. It questions the positive correlation between US yields and the dollar, also making markets increasingly beholden to newsflow from Trump’s Twitter feed. Equity markets have been hit by a deterioration in sentiment and the prospective negative impact on the global economy, which also threatens to pull investors back to the safe havens. Despite the Fed opting against any hawkish change to the FOMC statement, the US central bank remains the only bank set on a tightening path. The Bank of England remains staunchly dovish as it chooses to look at UK economic improvements and inflation increases as transitory at the risk of Brexit still being an economic headwind that needs to be factored in. This hawkish disappointment is a drag on sterling’s rally maintaining a medium term range play on Cable.