President Trump was at it again on Friday night, blaming China and the EU for manipulating their currencies and interest rates and again questioning the Fed for raising rates. The USD fell sharply, extending the moves from Thursday after Trump’s previous round of comments. The NZD has moved up above 0.68, helped by the broad-based USD weakness and a rebound in commodities.
The USD was weaker across the board on Friday, with the catalyst being another barrage of tweets from the US President. Trump tweeted that “China, the European Union and others have been manipulating their currencies and interest rates lower, while the U.S. is raising rates while the dollars gets stronger and stronger with each passing day - taking away our big competitive edge.” While the market already understands the President would prefer a lower USD and doesn’t like high interest rates, his comments still caused the DXY dollar index to fall 0.7%. The DXY is now 1.25% lower than the year-to-date high of 95.65 reached on Thursday night.
The question is what can the President do if he wants a weaker USD, besides lambast trade partners (and his own central bank) on Twitter? The Fed is an independent central bank and is unlikely to be swayed from its tightening plans for this year, while many other central banks are constrained from raising interest rates by low inflation in their countries. Treasury Secretary Mnuchin noted over the weekend that the US Treasury is monitoring the depreciation in the CNY and would “very carefully review whether they have manipulated the currency” – the Treasury’s report is due on October 15th. But regardless of the Treasury’s conclusion, the US has already started imposing tariffs on China. While we’re not convinced the President’s comments alone will change the direction of the currency market, it has nevertheless probably helped establish a short-term top in the USD.
The NZD was the top performing currency on Friday, rising almost a percent against the USD to close the week at 0.6810. Besides the broad-based USD weakness, a rebound in commodity prices (the LME metals index was up 1.3%) on Friday helped boost the commodity currencies, including the NZD. CFTC data released over the weekend showed speculative investors continued to hold near record short positions in the NZD. CAD was just behind the NZD on the currency leader board, boosted by stronger than expected retail sales and CPI data.
The Japanese yen also rose almost 1% on Friday, with USD/JPY falling to 111.41 (down from a high of 113.17 on Thursday night). The rise in the JPY was aided by reports that the BoJ might debate policy tweaks at its monetary policy meeting next week, including changes to its yield curve control programme (where the BoJ targets a 0% 10 year yield). Reuters reported that BoJ officials were concerned about the side-effects of its policies – including on bank profitability – and were considering tweaks to make its policy mix more sustainable. Japanese CPI ex food and energy is running at 0.2% YoY and it is likely the BoJ will need to again push out the date when they expect inflation will reach their 2% target.
The BoJ reports led to a 5bp rise in the 10 year Japanese government bond future during US trading hours, an unusually large move for Japanese interest rates. The 10 year Japanese government bond yield will likely open around 0.09% today, close to levels where the BoJ has intervened to preserve its yield curve control policy in the past. The Japanese moves contributed to a steepening in the US yield curve, with the 10 year Treasury yield up 4bps on the day to 2.89% while the 2 year yield was unchanged. St Louis Fed President Bullard said President Trump’s comments wouldn’t affect the FOMC’s rate decisions, although they likely added to the steepening pressure on the day.
US equities ended Friday around flat, despite Trump telling CNBC “I'm ready to go to 500”, in reference to imposing tariffs on all Chinese imports. To date, the US administration has put tariffs on $34b of Chinese imports, and is investigating a further $200b worth of imports for tariffs of 10%. Larry Kudlow, Trump’s economic adviser, noted the November mid-term elections wouldn’t stop the President on trade issues adding that Trump didn’t see equities as a barrier given they are over 30% higher since he took office in 2016. A strong earnings report from Microsoft helped support US equities, although the German DAX fell around 1%, weighed down by the auto sector. EC President Juncker and Trump meet this week, with Europe hoping to avert possible US tariffs on European auto imports.
Finally, on Brexit, EU chief negotiator Michael Barnier said the UK’s recent White Paper opened “the way to a constructive discussion” but said there were still major questions to be resolved. Eurosceptic backbencher Jacob Rees-Mogg subsequently accused Barnier and the EU of being “mafia-like”. Most commentators think the UK will still need to make major concessions to the White Paper to reach an agreement with the EU. Over the weekend, new Brexit secretary Dominic Raab suggested that the UK could refuse to pay its £39b divorce bill if it doesn’t get a trade deal, seemingly rowing back on an agreement with the EU last December. Despite talk of a “no deal” Brexit growing, the market prices an 85% chance of a BoE rate hike next month, with MPC member Tenreyro saying on Friday the UK economy had bounced back from a snow-related soft patch earlier in the year, suggesting she might be willing to vote for a hike in August.
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