Why The Trump Trade Rests on 115.00 in USDJPY

Market Drivers January 20, 2017
UK Retail Sales miss
Chinese data dump mixed
Nikkei 0.34% Dax -0.03%
Oil $52/bbl
Gold $120o/oz.

Europe and Asia:
CNY Chinese GDP 6.8% vs. 6.7%
CNY Industrial Production 6.0% vs. 6.1%
GBP UK Retail Sales -1.9% vs. -0.1%

North America:
CAD CPI 8:30

The dollar got its groove back as US yields on the 10 year climbed back above the 2.5% level while cable was clobbered by weak UK Retail Sales in December suggesting that UK consumers may be starting to feel the pinch of weak sterling.

UK Retail Sales came in at -1.9% versus 0.1% eyed. The biggest declines were in textile, clothing, non-household goods and repair sectors. UK Finance minister Hammond, speaking at Davos, noted that UK consumers are feeling the effect of lower pound as their purchasing power declines.

If cable remains at these low levels for the foreseeable future this could be a key factor in how well the UK economy performs going forward. Any benefit from lower sterling to the corporate sector may be offset by the decline in consumption and given the fact that UK economy is more than 75% driven by the consumer the negative impact could be substantial.

Cable dipped below 1.2300 in reaction to the news and remained there for mid-morning London trade.

Elsewhere Chinese economic data proved mixed with Chinese GDP coming in at 6,8% versus 6.7% eyed but Industrial Production missing at 6.0% versus 6.1% forecast. This was the slowest Chinese growth since the 1990’s, but on a much bigger base and the data indicates that economy continues to muddle along for the time being.

Commodity currencies initially responded positively to the news with kiwi climbing all the way to .7225 but as the overnight session wore on the pair gave up all its gains and was trading below .7150 party as a result of rally in US yields.

The move above 2.5% in the 10 year helped USDJPY as well with the pair breaking back above the 115.00 level which has become a key battleground between the shorts and the longs. A decisive move above the 115.00 figure would signal that the Trump trade is back on and markets are once again betting on substantial US growth, but a failure here would be a sign that the early enthusiasm for Mr. Trump is starting to wane. Today’s inauguration speech will be a good indication of how much power the Trump trade has left.