Greenback Bounces, More Fed Than Trump

The much-anticipated speech by US President Trump was light on the details that investors interested in, like the tax reform, infrastructure initiative, and deregulation. There appears to be an agreement to repeal the national healthcare, but there is no consensus on its replacement. 

The gains in the US dollar appear to be more a function of shifting expectations of Fed policy than new clarity on fiscal policy. By Bloomberg’s calculation, there is now an 82% chance the Fed hikes in two weeks. Our interpolation puts the odds at 74%. New York Fed President Dudley’s remark that an increase in rates has become “more compelling” was the catalyst.  

Seven Fed officials are still set to speak this week. Governor Brainard speaks after the US markets close today. Although she is not part of the Fed’s leadership core, her insight last year, and particularly the importance of the international settings, was important. On Friday, both Fischer and Yellen speak. Given the proximity of the March 15 FOMC meeting, it would be the last significant opportunity to try to shape market expectations.   

The US dollar is stronger against all the major currencies but the Australian dollar. News that Australia’s economy expanded 1.1% in Q4 16, among the strongest quarterly performances in the past five years lent support to the Aussie, which continues to encounters offers around $0.7700. It found bids near $0.7640, which need to be absorbed before it can test the lower end of the recent range near $0.7600.  

The story behind Australia’s recovery after the contraction in Q3 was a dramatic (9.1%) improvement in the terms of trade, due to the rise in iron ore and coal prices. This, in turn, seems to be a function of the stabilization of the Chinese economy. News earlier today showed that Chinese manufacturing PMI is rising to 51.6 in February from 51.3 in January. Output, new orders, and business expectations improved. The non-manufacturing PMI slipped to 54.2 from 54.6.