Trump Strikes Down Dollar, 3 More Headline Risks this Week

The U.S. dollar started this new trading week with another day of losses. The greenback either held steady or extended its slide against all of the major currencies. While there were no buyers at the start of the NY session, the selling only gained momentum on reports that President Trump complained about the Federal Reserve’s rate hikes at a Hamptons fundraiser this weekend. This is the second time that we’ve heard the President lament about Fed tightening and theoretically, his views are not supposed to affect monetary policy. However if the central bank raises interest rates next month but fails to commit to a fourth hike, there’s no doubt that some market participants will attribute that to pressure from the President regardless of whether its true. Yet, the real reason why the dollar is down today is because Treasury yields continued to fall and Fed President Bostic said he favors only 3 rate hikes this year, encouraging traders to cover their short positions in euro, sterling and other beta currencies.
 
The market’s reaction to President Trump’s comments gave investors a taste of what could drive FX flows this week. There are no major U.S. economic reports on the calendar and the only pieces of potentially market moving data from other parts of the world are Eurozone PMIs along with Canada and New Zealand’s retail sales reports.
So instead, the 3 main events that everyone should be watching are –
China-US Trade Talks > Tuesday and Wednesday
EU Brexit Negotiations > Tuesday and Wednesday
Jackson Hole > Friday
China – U.S. trade talks and the Jackson Hole summit could affect all of the major currencies whereas the impact of the EU-Brexit negotiations will be limited to sterling. David Malpass, the U.S.’ Undersecretary of International Affairs will be meeting with Wang Shouwen, China’s vice commerce minister. Although no material agreements will be made at these lower level talks, investors are eager to see if they can find enough potential concessions to move to higher level negotiations. If that’s the case, the potential easing of trade tensions will bolster risk appetite further, translating into additional gains for the Australian and Canadian dollars and possibly the euro as well. USD/JPY should also benefit but it is important to realize that the reason why the dollar could decline rather than rise against high beta currencies on easing of trade tensions is because it was treated as a safe haven when Trump slapped them with tariffs.
 
We do not expect any surprises from Wednesday’s Fed Minutes or the Jackson Hole summit on Friday. The minutes will paint a picture of an improving economy and reinforce the expectations for tightening next month. At Jackson Hole, Fed Chair Powell will most likely discuss their success in supporting growth and limiting inflation. As Fed hikes are not expected to peak until the middle of next year, he should stick to script and say that interest rates will need to be increased gradually in the months ahead.
 
As for Brexit, we don’t expect any significant progress but with the October deadline quickly approaching, a lack of positive developments could be perceived as negative for the currency. About 2 years ago, the European Commission’s Chief Brexit negotiator Michel Barnier gave the UK 18 months to negotiate the terms of exit. At the time, he said the “negotiations need to be done by October 2018….just before the European elections.” But that date is now only 2 months away and Prime Minister is still struggling to get the EU to bend on major issues like the Irish border. The European Union on the other hand see the deadline as a way to get the UK to bend so as the clock ticks, not only could the deadline get pushed to November but the chance of no deal increases exponentially. None of this is good for sterling and this explains the restrained rally in GBP/USD despite hefty short positions and decent data.
 
EUR/USD on the other hand is closing in on 1.15. The rally was driven by the combination of U.S. dollar selling, short covering and the relief that Italian bond yields fell sharply after rising steadily for the past 2 months. According to last week’s CFTC data, speculators are short euros for the first time in over a year. While this may not be surprising or seem significant, it is a big change from April, when euro positions were net long and at their highest level in 2 decades. We are very far from extreme levels on short positions (which means there’s more room for EUR/USD to fall) but after such a large adjustment that involved fresh sells and the closure of longs, the recent recovery attracted bottom pickers. If EUR/USD is able to rise above the 200-week SMA at 1.1470, the next stop should be 1.1550.
 
In contrast to the European currencies, the rally in the commodity currencies were more restrained. The Australian dollar led the gains thanks to the rise in the Shanghai market and the Chinese Yuan. The minutes from the last Reserve Bank of Australia meeting are scheduled for release this evening. Given Governor Lowe’s optimism and the central bank’s focus on the favorable outlook for the economy and the strong likelihood that the next move in rates will be a hike, the minutes should help rather than hurt the currency. The Canadian dollar benefitted from higher oil prices and the possibility of a breakthrough in NAFTA negotiations in the next few days or weeks. The New Zealand dollar also bounced off its lows to end the day unchanged. Tomorrow will be a big day for the currency with a dairy auction and second quarter retail sales report on the calendar. Dairy prices saw no change at the last auction after falling 5 out of the 6 auctions. If they fall again, NZD will have a tough time rising but if they increase for the first time since May, it could be just what NZD/USD needs to squeeze to 67 cents.