Three Reasons to Trump's USD Decline

Volatility is on the menu for the next four years and it was kicked off by Trump's first press conference since July. The US dollar fell as he spoke and was the laggard on the day; the Australian dollar led the way as it continued its strong start to the year. Japanese current account data is later. As gold extends higher, we note the metals' stabilisation relative to non-USD pairs. Will metals survive another fresh run-up in bond yields as Fed speakers respond to higher inflation? Will Donald Trump's fiscal stimulus promises be offset by confrontational international trade policies? Does any of this matter if stocks rise and miners push along with them?

Trump set off a sharp round of US dollar selling for three reasons, some of them will last and some could quickly fade.

1) It always comes back to growth

Trump's press conference was highly anticipated and that helped to stoke unrealistic expectations. People expected him to touch on everything but he was battered with questions on Russia and building a wall. US dollar bulls had hoped he would deliver something to shore up confidence that growth-inducing measures are coming. That could be fiscal stimulus, tax reform or regulatory reform but he left those areas untouched or didn't add anything new besides the regular hyperbole like saying he was going to be the greatest jobs creator in human history.

2) He singled out pharma

Shares of pharmaceutical companies slumped after Trump singled out the industry as one that's leaving the US and overcharging Americans. He vowed to launch a bidding system for drugs. The pattern so far is for him to start with an industry and then begin attacking individual companies. That's what he did with automakers and if he begins to single out companies, expect more risk aversion.

3) You say you like volatility

The markets will ultimately reflect the President. He's calculating in his unique way but he's also a loose cannon. The shots at pharma came out of nowhere. More broadly, the press conference was amazing viewing if only because you never knew what he would say next or how he would say it. He accosted CNN and showed that a cornerstone of his personality is defensiveness. That kind of personality can only add to volatility in the four years ahead and risk assets prefer less-stormy seas. The other dollar-negative factors will fade in the days and weeks ahead but his volatility personality won't change.

The final factor that undermined the dollar was a strong 10-year bond auction. The yield was two basis points lower than markets were anticipating and that cut the knees out of USD/JPY in a quick move to 114.25 from 115.15. That was a four week low in the pair and darkens the technical picture. We wrote about the crowded bond bear trade yesterday and it appears it was a bit too crowded, at least for the day.

Looking towards Asia-Pacific trading, we will be keeping a close eye on commodity FX. The Aussie is sparkling so far this year and a rebound in oil sent USD/CAD below the critical uptrend that started last May. The calendar is light but features Japanese current account data at 2350 GMT.