A unified Eurozone versus a US administration looking a little pained and discombobulated after yet another vexing Russia headline was the catalyst to send the euro soaring. As the political drama ‘of, by, and for the people” was unfolding but linking an unforeseen Russia-gate admission by Donald Trump, Jr and dovish Fedspeak was fire enough in to topple the greenback in thinly traded summer markets. How significant the latest Trump developments are to the broader market landscape is debatable, but one obvious take from overnight headlines was an unexpected policy shift from Patrick Harker, by failing to cement the markets call for a third 2017 rate hike.
Today’s revelation that a series of emails by Donald Trump Jr., confirming he was offered Russian government help for the Trump election campaign has sent US political risk to another level.
Investors are once again questioning President’s Trump’s administration ability to pass through a pro-business agenda/attitude/stance to further stimulate the US economy, not to mention his sustainability to run the country. While the headlines are not impeachment worthy news, the market buzz does suggest the risk of impeachment proceedings is marginally higher than in the past. But each progressive revelation of the current administration’s incompetence is wearing thin on investors psyche that even the most ardent conservative must now have second thoughts about their Nov (2016) election day decision. Needless to say what little support that remained for the strong-dollar theme this week quickly evaporated On Fed speak: while the market was waiting for Lael Brainard, a leaning dove, Fed Harker’s unexpected WSJ interview 30 minutes after Jr’s headlines suggesting the Feds remain in wait-and-see mode drove the final nail in the dollar’s coffin during the overnight session.
Fed Chair Yellen’s semi-annual monetary policy testimony will be the main event today, but given the Humphrey-Hawkins Testimony is very much a repeat of the latest FOMC minutes, and given the heightened US political risk, the market is more focused on political headline risk in early APAC. Nonetheless, the market expects Yellen to frame the commencement of balance sheet normalising around a comparatively upbeat economic assessment, but even this tone is unlikely to shift the current dollar tide.
It didn’t take much for the market to fold their cards on a long dollar trade this week which suggests this Fed-inspired move could have some legs and perhaps only a surprising shift in US CPI or Retail Sales data later in the week could stem the current tide.
G-10
As the headlines rolled in US yields fell by the minute pressuring the USD in G10. USD/JPY toppled to 113.75, while EUR/USD looked toward 1.1500 while Donald Trump, Jr.’s email release appeared to have started the move, it was Fedspeak which drove the dollars short term demise home. With CPI around the corner and Harker suggesting that inflation will determine whether a third rate hike in 2017 is on the cards, speculative money suggests the view heading into this week’s CPI is that of non-transitory.