In what is now a common occurrence, Trump opens his mouth and causes risk sentiment to deteriorate – equities fall, the VIX rises, UST yields fall and the USD weakens.
Yesterday we reported on the USD recovery, supported by increased hope that US tax reform talks had made some progress, but that good news vibe has been shot down by Trump opening his mouth again. Trump threatened to bring the US government to the brink of a shutdown, if needed, to pressure Congress into funding the US-Mexico border wall. These comments complicate the job of Congress to raise the debt ceiling, something that is high on the list of market concerns. Fitch Ratings didn’t help sentiment, commenting that while a government shutdown would not have a direct impact on the US’s AAA rating, failure to raise the debt ceiling in “a timely manner” prior to the drop-dead date would force the agency to review the sovereign rating.
Trump added to market concerns when raised some doubt that a NAFTA deal could be renegotiated successfully. “Personally, I don’t think we can make a deal....so I think we’ll end up probably terminating NAFTA at some point”, he added.
The USD is down about 0.4% on the DXY and 0.2% on the TWI-majors index, the latter moderated by underperformance of the CAD and Mexican peso on those NAFTA comments. Soft US new home sales data didn’t help sentiment for the USD.
EUR is up 0.4% to 1.1810, with a good set of PMI data helping, while Draghi’s speech in Germany didn’t show any push-back on EUR strength. He seemed to deliberately avoid and any specific signals on the ECB’s current policy outlook.
The NZD has underperformed, falling 0.7% against the soft USD and is down on all the crosses. The beginning of the fall seemed to coincide with the release of the government’s economic and fiscal update, but we don’t believe that was of particular concern to the market. The release coincided with the Tokyo open where we saw selling pressure for both the NZD and AUD. We can’t remember the last time an NZ fiscal report caused a market reaction. To be sure, the projected surpluses were slightly lower than expected as Treasury moderated its growth outlook, but they were still a strong set of fiscal accounts. The NZ taxpayer can be grateful that Treasury revised down its growth outlook, which should help moderate any pre-election bids to spend those growing surpluses.
As we’ve previously noted, net speculative positioning has been extremely long the NZD, which hasn’t made much sense to us, over a period of where NZ commodity prices have been softening a little, risk sentiment was vulnerable to fall, the RBNZ was never going to offer any support at its MPS and with political risk increasing around an uncertain election outcome. So the inevitable correction in positioning continues, sending the NZD south.
Most of the damage was done during NZ trading hours, with the currency only down slightly since the local close, now 0.7225 after briefly dipping below 0.72 earlier this morning. NZD/AUD is down to 0.9140, a fresh 5-month low, while the fall in NZD/EUR to 0.6115 takes that cross to its lowest level in 14 months. GBP has underperformed, which sees EUR/GBP up to its highest level in almost eight years at 0.9230, ignoring the intra-day flash-crash last October. Still, NZD/GBP is down 0.5% to 0.5640.
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