USD: Correction lower extends after President Trump’s inauguration speech - MUFG

The foreign exchange market has been relatively stable during the Asian trading session with the US dollar remaining on the defensive in the near-term notes Lee Hardman, Currency Analyst at MUFG.

Key Quotes

“President Trump provided further evidence yesterday of the shift to more protectionist trade policies by ordering the withdrawal from the Trans-Pacific Partnership trade agreement which he described as “a great thing for the American worker”. He also told business leaders at a breakfast meeting that at the White House that he would impose a “very major” border tax on imports from companies who shift production overseas which costs the US jobs.”

“As part of his plans to “bring manufacturing back”, he noted that “we are going to be cutting taxes massively for both the middle class and for companies, and that’s massive”. He also stated that he would cut regulation by 75% and in his view “regulation wins” over tax cuts as a more important factor in promoting growth. If President Trump’s policies prove effective at boosting growth, they will encourage a stronger US dollar in the year ahead.”

“Further comments from US Treasury Secretary nominee Steve Mnuchin on the US dollar have also garnered some market attention overnight. In a written response to a Senator’s question about the implications of a hypothetical 25% increase in the value of the US dollar, he noted that the “an excessively strong US dollar may have negative short-term implications on the US economy”. During the hearing he emphasized that a strong US dollar was important over the long-term and that it is currently “very, very strong”. We would not expect the comments to weigh on the US dollar as they do not appear to signal that he intends to talk down the US dollar.”

“The recent pullback for the dollar could extend further in the near-term if it encourages a lightening of long US dollar positions. The latest IMM report revealed that long US dollar positions still remain elevated especially amongst leveraged funds. There are similarities to the positioning at the start of last year when the market was expecting the US dollar to strengthen further following the first Fed rate hike in December 2015 but the dollar index declined by around 7% during the first four months of last year. On that occasion the US dollar was undermined by very weak US growth during the first half of last year which significantly delayed further Fed rate hikes. On this occasion, the strength of the US dollar appears to be built on firmer fundamental foundations with the US economy on course to continue expanding solidly during the first half of this year.”