Trump inauguration key for market direction from here

USD and risk bulls wait in the wings. GBP weakness abates, while brief CAD ‘purple patch’ ends

It has been a lively week, but one which has been ‘hampered’ by the much-awaited US presidential inauguration Friday.  We have seen somewhat of a rollercoaster ride in the USD, but this has been largely as a function of the yield curve, which was given a firm boost by comments from Fed chair Yellen in San Francisco after we started off with USD longs getting pared in the early part of the week.  Concerns over Trump’s trade and currency stance have seen the yield play tempered significantly through the week, but with rate hike expectations tilting back towards 3 rather then 2, UST yields have risen notably, with both the 5 and 10yr up around 15-18 bps since very late Wednesday.   

The key target has been USD/JPY with buyers keen to get in on the reflation/risk trade, and effectively putting a near term base in the mid 112.00’s. This may prove premature if the equity markets are unnerved by the new president’s, but underpinned by the baseline scenario that the Fed moves twice this year at the very least, losses beyond 111.00-112.00 were very likely to have been limited. As it stands we based out just ahead of 112.50, but the upside is finding some resistance through 115.50 as we wait on clearer signals from the new administration at the White House. On the JPY side, the BoJ continue to signal their ongoing accommodative stance, but the weaker currency continues aid reflation.

Inflation inside the EU has also been aided by the weakness in the EUR, but in this week’s ECB meeting and press conference, the governing council were keen to point out the distorted effects on headline CPI, while core remained sluggish.  Having pierced 1.0700 a few times, the lead spot remains heavy given the overwhelming rate differentials, and although projections for parity have been pushed further out on the horizon, the market is still ever ready to pounce on rallies from here.  1.0600 looks to be the current pivot, but episodes of risk off have the potential to see the pair testing further into the 1.0700-1.0800 zone, if not a little higher.  USD/CHF is mirroring the price action to some degree, with EUR/CHF still trading a very tight range in the low 1.0700’s for now.

GBP traders now have a clearer picture on Brexit, though Tuesday’s speech by PM May was more an opportunity to underline/confirm what many expected to be the case.  Stating that we are making a clean break from the EU, the early part of her address was aimed at placating the European Union, in that the UK will be looking to redevelop strong trade relationships to the benefit of both sides of ‘the pond’.  Single market access remains the key concern for London and UK growth prospects further down the line, but reports from some of the leading banks in the city that some jobs will be lost to the continent do not seem to have hurt GBP to any notable degree as yet. This is partly down to the acceptance that parliament will get a vote on any final Brexit deal, so hard Brexit fears have been allayed to some degree.  1.2000-1.2450 covers Cable for now, while EUR/GBP looks as reluctant to test the early week highs in the mid .8800’s as if does sub .8500.

CAD strength gathered momentum in the early part of the month/year, but in 1.3000 we found a strong base in the spot rate, which was further underpinned by the drop back in Oil price. We continue see WTI looking comfortable on a USD50.00 handle in the near term, but the domestic data in Canada remains mixed along anaemic inflation highlighted by the BoC on Wednesday, while the NAFTA renegotiations also weigh.  Add in broad based USD strength resuming, and it is not hard to see why some see a return to 1.3600 and beyond despite the tailwind effect of US economic growth.  AUD and NZD continue to ‘fight against’ the bullish USD ‘trend’ however as positive drivers in base metals continue to bolster.  AUD/USD, and more so AUD/JPY remains key bellwether for stocks through the FX market, with NZD following on the coattails – for now.