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Weekly Market Analysis
Trumpshaker

Karl Schamotta January 13, 2017

– Dollar Reversal Gains Momentum

– Euro Gains Ground on ECB Disarray

– Oil Price Rebound Supports Canadian Dollar

 

More than two hundred years ago, British banker Nathan Mayer Rothschild said that investors should “buy on the sound of cannons, and sell on the sound of trumpets”. His words clearly retain some relevance today – in recent weeks, traders have sold the dollar whenever president-elect Trump has made a sound.

This reversal of fortune reached a new nadir during Wednesday’s truly bizarre press conference when Mr. Trump appeared uninformed, unprepared, and uncertain about his own political agenda. Although ostensibly designed to provide clarity around his pro-growth policy platform, the briefing degenerated into a series of diatribes about Russia, intelligence services, and Democratic opponents – leaving markets without critical insight into his deregulation, tax reform, or fiscal stimulus plans.

The dollar fell sharply through the presser and its aftermath, with cabinet confirmation hearings in Washington only serving to weaken the currency further as the week progressed. In public testimony, many nominees contradicted Trump’s positions on foreign policy, immigration and the military – suggesting that his team has not yet achieved the cohesion necessary to enact a broad-reaching economic reform programme.

As we close out the week, the dollar is down almost two percent from the trade-weighted high reached in early January, trading near a five-week low as interest rate differentials tighten. The pound sterling has snapped back from the three-month low recorded in the minutes prior to the press conference, while the Japanese yen has leapt almost 1.5 percent higher in the last few days.

The euro was given an additional boost higher yesterday when the European Central Bank released a record of the Governing Council meeting held in early December. Per the published account, the central bank’s widely-watched decision to extend and reduce monthly asset purchases was fairly contentious, with a number of policymakers expressing a desire to reduce stimulus more quickly. Should core inflation pressures continue to build, the balance of opinions could shift further in a hawkish direction over the year ahead and trigger a tightening in euro area financial conditions – reversing some of the dilution that has occurred over the last few years. Communications accompanying next week’s rate decision could trigger some volatility…

Investors are also redeploying cash into Canada, encouraged by a sharp improvement in crude prices. West Texas tea is trading near the $53 handle, sitting on solid gains after a week during which the dollar fell, China reported record consumption levels and Saudi Arabia claimed to have cut production by more than the amount agreed with other cartel members. The forward price curve remains in contango, meaning that oil delivered in the future goes for more than on the spot market. This allows producers to sell their future output at relatively attractive levels and enables them to make investment decisions with a high degree of confidence. While the boom years certainly aren’t coming back and a major production overhang remains, our travels through the Canadian oil patch have uncovered a palpable sense of optimism – rig counts are rising, and capex budgets are slowly recovering. We would expect to see a slightly brighter outlook evidenced in next week’s Bank of Canada rate decision – potentially providing fuel for a run through the technical resistance levels that have been established over the last few weeks.

On balance, we are sorely tempted to call the top of the reflation trade – but there are good reasons for a renewed run higher at some point in the coming weeks or months. The US economy continues to accelerate, with hundreds of thousands hired every month, employers paying higher wages and sentiment surveys indicating that consumers and businesses see light at the end of the tunnel. Lending activity, spending numbers, and investment levels all continue to improve, suggesting that gross domestic product will continue to expand at a relatively rapid clip, while the Federal Reserve pulls rates higher.

Against this backdrop, it’s no longer reasonable to assume that the currency will continue rocketing higher through the coming year – but betting against the dollar remains fraught with peril.

Caveat trader.

Karl Schamotta
Follow @vsualst

Counterparties:
Reading suggestions to keep you warm this weekend:

Bloomberg: Trump’s Border Tax May Weaponize the Dollar
Council for Foreign Relations: China’s Exorbitant Detriment
Bank of Canada: Winter Business Outlook Survey
Le Monde: Of Productivity in France and Germany
Bank for International Settlements: the Globalisation of Inflation
Bitcoinity: RMB Transactions Account for 98% of Global Bitcoin Trading Volume
World Economic Forum: 2017 Global Risks Report
Ladbrokes: Trump Impeachment Odds
The Economist: Big Mac Index

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