Market News & Insights
1 February 2017

Currency Wars – This time its personal

Trump has made no secret of his views that China and other countries are actively engaged in currency manipulation, depreciating their own currency values against that of the all mighty greenback, the world’s premium reserve currency. Trump has been on a personal crusade throughout his campaign, with China mainly in his crosshairs, commenting that a strong USD is harmful to US businesses. However this time it was Trump’s top trade aide, who in an FT article suggested that Germany are taking advantage of a weak Euro to boost their competitiveness, calling the Euro “grossly undervalued” and suggesting that Germany have a hand in a weak Euro in order to “exploit” the US and their EU counterparts. That there is fighting talk and the instant reaction was a Euro rally of 1.8% against the USD. The USD in fact, was heavily sold across the board, the USD index was down over 1% as markets already nervous about Trumps’ hair trigger, fear a rise of currency wars once again.

We’ve discussed this topic on a number of occasions over the last few years, the reality is the “C.W.” headline itself is more attractive and stokes panic in the public rather than the markets, but that’s not to say a comment like yesterdays does not give rise for concern. Take into account also it was month end and there were rebalancing flows with Barclays suggesting that USD supply was indeed likely as a result. The USD has since recovered into today’s session, but EURUSD is still looking towards a band of resistance from 1.0835 to 1.0880 area. A break above there and we could see overshoot towards 1.0982 before pre 1.1000 selling takes place. It remains a huge week for the USD and while Trump and co carry huge ability to move USD pairs, there is key fundamental drivers due over the next couple of days. Manufacturing data headlines today’s European calendar but later in the evening the FOMC cross the wires. No change is expected from them but markets have built up expectations of several rate hikes this year and if the FOMC sound in any way cautious USD selling may really take off.

It was a game of two halves for GBP yesterday, a huge deterioration in consumer credit from 1.9 bln to 1.0 bln coincided with a selloff in GBP in the morning and consumer spending accounted for a good degree of the pick-up in UK GDP that we highlighted last week. The selloff saw EURGBP break above .8580 resistance and accelerate right up to .8640 before a reversal in the afternoon saw a drop back towards .8575 this morning. GBPUSD has a similar round trip, breaking below 1.2480 support to 1.2412 lows, before ramping back to trade above 1.2600 this morning as UK manufacturing PMI data posted as expected at 55.9. Tomorrow is “Super Thursday” however, and the BOE are covering every angle with their interest rate decision and QE target due to be announced, followed by their inflation report, with Carney speaking to the press on inflation at 12.30pm (GMT). Inflation has been surging in the UK, and with expectations CPI will surpass the BOE’s target, any indication it impacts the BOE’s easing plans, or indeed may cause them to tighten and raise interest rates will only be favorable for GBP.