President Trump and his sidekick Peter Navarro got what they wanted yesterday; a weakening of the dollar, following their criticism of America’s trading partners for currency manipulation.
The dollar index fell to levels not seen since the election. The euro traded above 1.08 and the pound at almost 1.2700.
The issue facing Trump's administration is that rates will need to be hiked throughout the year to avoid the economy overheating and view that was backed up by Fed. Chairperson Janet Yellen following yesterday’s FOMC Meeting.
She painted a fairly upbeat picture of the U.S. economy that suggested it was on track to tighten monetary policy this year.
It will be difficult to weaken the currency when interest rate differentials are working in the opposite direction. The U.S. may just have to a stronger dollar based on economic fundamentals while the rest of the world catches up. I am sure President Trump will be able to take credit down the line.
Today is Super Thursday
The Bank of England steps forward to take centre stage today as the Monetary Policy Committee meets and the Quarterly Inflation Report is released.
It is fairly inevitable that the committee will vote 9-0 to leave rates unchanged. The Asset Purchase Scheme will also be left as is.
The Governor, Mark Carney, will sound the alarm on inflation and voice concern over the behaviour of consumers.
Since the Inflation Report is very forward looking, detailing economic analysis and inflation projections on which the Bank's Monetary Policy Committee bases its interest rate decisions, and presents an assessment of the prospects for UK inflation over the following two years, there is a possibility that we may get the Bank’s first indication of how it views Brexit negotiations.
The pound rallied as the dollar fell yesterday and despite calls from leading banks (HSBC and Bank of America) for a further test of 1.20 it is more likely to see 1.30 first. The timing of the HSBC call couldn’t have been worse, issuing their trade recommendation literally minutes before Trump's tirade about dollar strength.
The bill to allow the government to trigger Article 50 of the Lisbon Treaty was passed easily in Parliament. Now MPs will be able to debate the actual negotiation stance the government will take. Discussion will centre on the single market but, as the EU has already stated, the single market is inextricably linked to free movement.
A bit like love and marriage, “you can’t have one without the other”, as the song goes.
Japan bites back
The odds were on the Germans to take the first swing at Trump's currency manipulation jibe, but it was Japan who was first out of the blocks (excuse the mixed sporting metaphor).
Prime Minister Shinzo Abe defended the Bank of Japan's massive stimulus program, saying it was intended to reflate the economy and was not currency manipulation. Japan has long been seen as having a weak yen policy but that is more an effect of its reflationary policies than the other way around.
Senior Japanese officials, worried about the pain a rise in the yen could inflict on the export-reliant economy, scrambled to contain damage as the dollar hit a two-month low of 112.08 yen on Tuesday, following Trump's remarks. Japan hasn’t intervened officially in the currency markets since 2011. The days of Central Bank intervention seem to have disappeared with the increase in globalization and trade deals.
Prime Minister Abe is due to meet Trump next week. I am sure they will find plenty to chew over
And so to Australia
Today’s report is a bit of a travelogue finally arriving in Australia!
A record trade surplus was revealed today as climbing commodity prices combined with benign import growth. A bumper Aud 3.550 billion was substantially more than the 2 billion forecast. The AUD gained 0.75% on the news.
Despite being so far away, even Australia has not excaped the sharp tongue of President Trump.
He described a refugee swap deal with Australia "dumb" on Thursday after a Washington Post report of an acrimonious telephone call with Australia's prime minister threatened a rare rift in ties between the two staunch allies.
When Australian Prime Minister Malcolm Turnbull turned the conversation to Syria, Trump ended the call after just 25 minutes of a scheduled one hour call.
Last summer, then President Obama had agreed to take 1,250 asylum seekers in exchange for Australia resettling refugees from Central America.
Clearly won’t be interested in such a trade, but the sooner he understands politics as being defined by both negotiation and magnanimity, the sooner the world will accept his presidency.