FX Traders Focus on Trump Speech for Jawboning on Trade, Dollar

Traders in the world’s biggest financial market are fixated on President Donald Trump’s State of the Union address Tuesday.

Currency traders are watching to see if the president will use the speech to comment on the dollar or U.S. trade policy, after a series of statements from the administration whipsawed the greenback, bonds and stocks last week. The dollar has fallen more than 3 percent this month, adding to a loss of almost 9 percent last year, pressured by shifting perceptions of monetary policy and overseas economic growth.

Here’s what analysts had to say before the speech:

  • TD Securities (Ned Rumpeltin, note)
    • “We expect him to celebrate various ‘wins’ from his first year in office, and to push a relatively limited set of proposals for immigration reform, ‘fairer’ trade deals, and potentially infrastructure investment. Only the last of these is likely to be market-friendly”
    • Don’t expect Trump to announce any actions on Nafta, but could see more protectionist rhetoric
  • RBC (Sue Trinh, note) 
    • Markets are seeking more specifics about Trump’s infrastructure plans
    • “But scant reference to this or the timing and budgeting details may disappoint USD bulls”
  • Cambridge Global Payments (Karl Schamotta, Jan. 29 note)
    • Trump “could have an impact on exchange rates by more clearly articulating the administration’s evolving views on trade.” Trump has taken aim at China, Canada, Mexico and the EU, but with trade negotiations stalling, the administration may adopt a more gradual approach
    • Currently, “the prospect of a global trade war has faded from the collective market memory – and an escalation in the President’s rhetoric could certainly bring the fear trade roaring back”
    • Risk premia may rise before and during the address; owning optionality and holding dollars may become more attractive, with potential for a technical correction in the greenback’s slide
  • Jefferies (Brad Bechtel, Jan. 29 note)
    • The address will be “key” on the trade front, as “imbalances in the FX market continue to grow and we are at the extreme in many currency pairs”
    • Asian emerging-market currencies have risen a lot in a short period of time, and officials in Malaysia, South Korea, Indonesia and Thailand are struggling with this
    • “Against the backdrop of the G-20 agreement on FX rates and the U.S.’s hawkish view on currency manipulators, these central banks are reluctant to move, but something will have to give. They are under a good amount of pressure”
    • USD is “very oversold” and “sentiment is about as bearish as it gets,” but after recent selloff, “it’s unclear how much more downside we have before we get a correction back the other way”
  • Deutsche Bank (Alan Ruskin, Jan. 26 note)
    • “The State of the Union address is normally not an FX market mover, and I doubt it will be this time. But if there is a market-sensitive topic that may get a kick start, it is U.S. trade relations with China”
    • If the U.S. attacks China’s transgressions under World Trade Organization rules, in the longer-term it “could prove both CNY-negative and negative for most Asia EM FX”
    • Recommends short CNY/JPY in a risk-off environment; also offers some protection against any official Chinese exodus from U.S. bonds; yen would appeal as an alternative reserve asset
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