USD: Trading Trump's Address To Congress – Views From 10 Major Banks

Credit Agricole: Trump may struggle to revive the ‘Trump trade’

US President will address Congress late on Tuesday and according to some reports he is expected to outline the progress made so far and urge lawmakers to follow up with legislation to maintain forward momentum. The list of topics is expected to be broad, including public safety, healthcare, tax reform and deregulation. Investors are likely to focus in particular on any details of the ‘phenomenal’ tax package signaled earlier by the President, particularly as the Treasury Secretary and members of Congress have recently cautioned not to expect legislation to be implemented before next year. Given that Republicans control both houses, the optics of the President’s appearance in front of lawmakers are likely to be constructive but the lack of significant policy detail in the speech will likely prevent a sustained revival of the long-USD ‘Trump trade’.

BTMU: Scope for disappointment on tax reform; USD/JPY to drift lower.

In a speech yesterday, President Trump stated that his first budget will focus on public safety and national security. He is seeking to increase defence spending by USD54 billion which would be offset by savings elsewhere. He added that he will make a big statement on infrastructure spending when he addresses Congress today, and that he is going to be moving very quickly on regulatory reform. However, there appears some scope for disappointment on tax reform at least in terms of timing as President Trump stated that his tax plan will only be released once they have released their proposal on Obamacare and have a clearer indication of the costs involved. USD/JPY is likely to continue to drift lower in the near-term if President Trump fails to provide fresh impetus for reflation trades today.

TD: Fade A USD bounce if no details on Border Adjustment Tax ‘BAT’

The market remains sensitive to the news flow ahead of the unofficial SOTU. Ultimately, we believe that market participants looking for details will likely be disappointed, especially with market expectations of a Mar rate hike bouncing to nearly 50% in recent days. Recent news headlines have shown an emphasis on budget proposals with anti-terrorism and infrastructure the key features. This comes with a little focus on the fiscal agenda, which we view is an exercise in managing expectations. We think that the lack of consensus on how to handle Obamacare and implement broader tax reform has left the administration trying to lower bar for the speech. For the FX market, the drivers will be whether the speech keeps the equity rally going or there is an endorsement of BAT. A positive tone that encourages cooperation could benefit risk assets and the USD but would prefer to fade a USD bounce without discussions on BAT.

Barclays: Policy announcement might not come

Trump will deliver his long-awaited speech to a joint session of Congress on Tuesday (9 PM EST). Although market attention will be keenly focused on the speech, it is unlikely that new details regarding fiscal stimulus, tax reform or trade policy will be provided. The administration intends to push forward fiscal reforms before August, according to Treasury Secretary Mnuchin, but details on tax policy are likely to come after March, when Congress finishes working on repealing and replacing the Affordable Care Act.

BNPP: Risk-reward attractive for long USD ahead of this week’s 3 major events.

There are three key events in the US this week: US President Trump will address a joint session of Congress (28 February), January Core PCE data (1 March) and Fed Chair Yellen’s speech (3 March). Trump is expected to reveal his fiscal plans, the market expects core PCE to rise further to just 0.2pp below the Fed’s 2% target, and Yellen’s speech will be her last before the blackout period ahead of the 15 March FOMC meeting. Pricing for a 25bp March rate hike stands at around 35% and in total there are only two hikes priced for 2017. In our view – following continued rhetoric from several FOMC voters that a March hike should not be taken off the table – the risk heading into the three events are skewed towards the market needing to increase pricing for Fed tightening and the USD strengthening in sympathy.

BofA Merrill: Risk of lack of sufficient details.

It feels like it has been a very long time coming, but markets will finally hear from President Trump at next week’s address to Congress. Anticipation is running high, and investors will be looking for clarity on the new administrations agenda. As we argued earlier this week, if fiscal progress is delivered, rates and the USD should move higher. The risk is that we do not get the level of detail on policies markets are waiting for.

Goldman Sachs: Political picture looking a little less rosy.

With President Trump set to address Congress tonight, the difficulty congressional Republicans have had on Obamacare does not bode well for quick progress on tax reform or infrastructure funding. This reinforces our view that a fiscal boost worth about 1% of GDP (largely via tax cuts) is primarily a 2018 story. In the meantime, Mr. Trump’s administrative actions on trade and immigration present downside risks to growth.

NAB: Difficult to see how Trump can offer real specifics?

All up, it is difficult to see how Trump can offer real specifics on how his programs will be financed – if that is what markets want to avoid a further clear-out of positions. By definition, what we’ve learnt so far suggests the details today will be sketchy – long on vision and passion, but short on specifics. That does not mean yields and the USD won’t get another small nudge up immediately, but price-action in recent weeks suggests markets want more and positioning, especially in bond markets, is weighing. Disappointment could set in fairly soon after. Then again perhaps we might have to wait until soon-to-be-seen headlines on the looming debt ceiling deadline of 15 March appear? Any move lower in yields will impact the USD and if the resulting market turbulence is sufficient, perhaps the Fed too, scotching any ideas of a March 15 hike.

UniCredit: Market response depend on the question of border-adjustment taxes.

Today’s highlight is President Trump’s speech to Congress with everyone hoping for him to go beyond rhetoric and disclose some details of the new administration’s planned tax reform. As Andreas Rees highlighted in the Sunday Wrap, it is highly speculative to come up with a clear picture for markets ahead of any detailed announcement and the market response may heavily depend on the question of border-adjustment taxes, which in our view would have negative consequences not just for the main US trading partners but for the US itself. In the end, it would not be surprising to see US yields moving slightly higher across the curve due to a revival of the reflation trade story.

Lloyds: Too early to expect much.

Markets will be looking for more detail on both trade policy and his tax and spending plans. But, it may be too early to expect much, as reports suggest the administration have yet to fully agree on specifics. For now, agreement seems limited to some specific spending measures – an increase in defence expenditure but a reduction in environmental protection. A more comprehensive package, including tax changes, may only come later in the year. Even after that, the administration will need to get the agreement of Congress. Last week, the new Treasury Secretary Mnuchin said he hoped to reach agreement on tax changes before August, but warned it could take longer. All this suggests that the President may not have much to report, although he will likely be his usual combative self. 

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NZD: In A Holding Pattern And Still Oscillating: Where To Target? – ANZ

Lacking firm directional signals globally, the NZD remains in a holding pattern.

Prime candidates for a turn include the liquidity cycle or a liquidity-driven event, though at present it is difficult to identify both timing and the specific catalyst. The combination of a moderation in cyclical components of the New Zealand economy (housing, building consents) and the firm and timely reminder from the RBNZ that the currency does matter for its inflation profile (and hence delayed tightening cycle) has been enough to dent NZD strength. Could this extend into protracted weakness? We think the short answer is no, for several reasons:

 We don’t think the domestic growth picture is weakening – growth is moderating as capacity constraints bite not because of softening demand;

 Commodities remain buoyant;

 Core and headline inflation is picking up; with that comes the bias for higher rates. The RBNZ flagged a 2019 start to the tightening cycle; that’s way too far off for markets, who expect hikes sooner;

 Political stability is apparent;

 Fiscal credentials are strong.

Lacking a firm domestic driver to dictate direction, we remain focused on international forces. 

ANZ targets NZD/USD at 0.72, 0.70, 0.69, and 0.68 by the end of Q1, Q2, Q3, and Q4 respctively.

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USD: Timing The Last Bout Of Strength: 'It's Now Or Fairly Soon' – CIBC

The US dollar’s initial Trump bump has largely been sustained, but the President’s first month in office hasn’t seen any further gains on that front.

Attention has now shifted back to the central bank to give the greenback another boost, and while, on balance, Fed policymakers look like they have enough evidence to hike rates in March, the market is only assigning a 1 in 3 chance that they move at that meeting. Even if the Fed ends up passing on March, markets need to realize that another rate hike is coming soon, and that will push the US dollar stronger versus a variety of other currencies.

Risks also appear to be tilted to the upside, with the Trump administration still considering protectionist policies which could ultimately give greenback strength additional fuel. While administration officials have stated that they would like to see a weaker currency, actions speak louder than words, and trade policies remain a wild card. But as long as policymakers take a measured approach on that front, which is our base-case expectation, the US dollar is likely to begin losing ground in the second half of the year. That’s when large-scale monetary stimulus could start being pulled back in other places like Japan and the Eurozone.

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At the same time, the current account surpluses of those jurisdictions will begin to be seen in starker contrast to the large deficit in the US, adding another layer of pressure to the US currency.

So whether it happens within the next month, or fairly soon thereafter, the US dollar has one more bout of strength left in it before it starts a longer-term slide against a number of other majors.

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AUD: Supported By Improving Fundamentals; Unlikely to Reverse Gains N-Term – BTMU

The Australian dollar has derived support overnight from the release of the latest Australian current account report for Q4. The report revealed that Australia’s current account deficit continued to narrow sharply by around two thirds which equates to around 0.9% of GDP. It was the current account deficit’s lowest share of GDP since 1979. It has also helped to further boost confidence that Australia’s economy rebounded in Q4 and avoided a second consecutive quarter of contraction. The Bloomberg consensus forecast for economic growth in Q4 has been increasing and is now at 0.8% ahead of the release of the GDP report tomorrow.

The ongoing rebound in commodity prices which are boosting Australia’s terms of trade, Australia’s narrower current account deficit, still relatively high yields on offer in Australia, and very stable global financial market conditions are all encouraging a stronger Australian dollar.

The outperformance of the Australian dollar so far this year appears well justified by improving fundamentals, and appears unlikely to reverse in the near-term.

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USD/JPY: A Buy Against 111.50; EUR/USD: Stuck In Range; EUR/CAD: Short Attractive – SocGen

USD/JPY is a buy as long as it holds above 111.50 and that’s probably the case as long as 10s hold above 2.30.

French opinion polls still show Emmanuel Macron gaining on François Fillon and the more the contest looks like a two-horse race between centrist and the Front National, the more that supports a market-friendly outcome. The OAT/Bund spread is 10bps off its wides now, but the Euro will remain blighted by uncertainty and at 19bp, Bund yields are in any case hardly proving support. EUR/USD is stuck in a 1.08-1.04 range.

Brent’s stuck in an equally tight range, USD 53.5-58.0. But short EUR/CAD appeals all the same.

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CAD: Vulnerable To A Mix Of 3 Risks: Key Levels To Watch – TD

The recent bump in USDCAD is consistent with the lift in shortterm rate differentials.

The 2y US-CA spread sits around 43bp. Historically, this level has been consistent with USDCAD at 1.36 leaving it at a steep discount to one of its key cyclical drivers. The broader improvement in risk appetite has probably insulated CAD to some degree. However, we also think the market is pricing a small Trump premium on the greenback. Even so, positioning data shows a large buildup in CAD long exposure. IMM data has seen net long CAD exposure over the past six weeks, and long exposure is approaching the highest level since mid-2016. Our sentiment indices show CAD with the largest buildup in long exposure over the past 3 months.

We think this leaves CAD vulnerable to a mix of 1) SOTU 2) stronger US data and 3) BoC risks. The upside break of the 1.3130 level opens up a test of 1.3250.

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GBP: Broadly Range-Bound; Not A Buy – Credit Agricole

It’s a relatively quiet week in terms of UK data releases, with the exception of the February manufacturing PMI for the month of February. With manufacturing being only a small part of the economy and as the BoE links its monetary policy stance to long-term uncertainty, we believe that the currency impact is likely to prove limited.

Elsewhere, the House of Lords (UK parliament’s second chamber) will hold the committee stage on the Brexit bill, which will involve a detailed examination of the wording of the draft law, that ultimately should prove to be a non-event.

All of that is likely to keep the GBP broadly range bound.

With strongly capped central bank monetary policy expectations, more balanced speculative positioning and as political uncertainty may rise anew with the actual start of exit negotiations, we advise against buying the GBP.

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Will Trump end his market rally in the speech to Congress?

US President Donald Trump speaks to a joint session of Congress during the usually quiet hours of the Asian session in a speech that is anticipated to touch on many economic priorities.

Nearly 40 days into his presidency and nearly four months after winning the elections, will we get a definitive Donald Disappointment? Or will he say the world that markets want to hear, injecting fresh fuel into the rally?

Stocks and the dollar are at different stages of the Trump trade.

The Trump Trade

After the shock victory in November, the market’s thinking was that his promises of fiscal stimulus and lower taxes would boost growth, push inflation higher and interest rates would rise.

Stocks rallied on higher growth prospects as well as hopes for deregulation under a unified Republican government. Stock indices are reaching new record highs in recent days.

The dollar took a different path: rallying with stocks in late 2016 but stagnating in early 2017. One of the reasons was that the Federal Reserve had raised its own forecasts based on Trump’s promises. The usually conservative and cautious institution is usually “data-dependent” and not election promise dependent.

The dollar also stalled due to a reality check: promises cannot be kept. In addition, Trump’s erratic behaviour and his priorities such as the Muslim ban are not in line with what markets want to see from the administration.

New promises about a “phenomenal tax plan” were good for stocks but not for the dollar.

The bigger test

Ahead of the speech to Congress, due on March 1st at 2:00 GMT (21:00 in Washington), Trump gave some hints about his economic drives, and they provide causes to worry[1].

  • Defense spending: Markets want infrastructure, not defense.
  • Obamacare, not taxes: Apart from some health-related stocks, markets care a bit less about changes to healthcare but want to see deep tax cuts.
  • Wrong offsetting: Enhanced defense spending worth $54 billion will come at the expense of other expenditure, but not Medicare. Markets want more spending in general. Once again, infrastructure is absent.

The dollar was on the back foot due to these reports but managed to recover, also thanks to higher expectations for a rate hike from the Fed, and of course, anticipation to the speech itself.

If these priorities are confirmed, it could move stocks from the rally mode to a stagnation mode. For the dollar, things could get worse: from stagnation to a downfall, or at least a partial reversal of the Trump trade.

In any case, the biggest currency moves in reaction to Trump’s speech will be seen against the yen. USD/JPY has proved to be the biggest mover. However, a clear verdict, seen possibly only in the European session, will likely be seen against a wide array of currencies.

What do you think?

More: Trump Report Card: D for Donald and the Dollar [Video][2]

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US consumers are confident – the dollar isn’t

The Conference Board’s measure of consumer confidence beat expectations for February and reached a high of 114.8 points. This is a leap of 3 points from an upwards revised 111.8 number in January. The underlying components regarding the current conditions (133.4 points), as well as expectations (102.4), are also up.

Nevertheless, the US dollar does not count it as a reason to be cheerful. Earlier on, the US released a revision of GDP and it remained unchanged at 1.9%, a mediocre growth rate and below 2.1% expected.

There are bigger forces at play. President Donald Trump will deliver a highly anticipated speech at 2:00 GMT, during the Asian session. His address is expected to consist of economic plans, but early indications do not provide reasons for optimism[1]. The President prioritizes defense and healthcare over infrastructure and taxes.

Another force is the growing expectations for a rate hike in March. These should have supported the greenback, but the GDP release somewhat dampens the picture. The most critical publication is probably the average hourly earnings component of the Non-Farm Payrolls report due only on March 10th, five days before the Fed decision.

USD down

The US dollar is trading lower across the board

  • EUR/USD is around 1.0620 as we await European inflation data.
  • GBP/USD is recovering from Brexit worries and edges closer to 1.2450.
  • USD/JPY dips under the 112 level. Support awaits at 111.40.
  • USD/CAD stands out in weakness, falling due to the slide in oil prices, from the highs.
  • AUD/USD makes another attempt at the 0.77 level.
  • NZD/USD extends its recovery and tackles resistance at 0.7230.

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CAD: Vulnerable To A Mix Of 3 Risks: Key Levels To Watch – TD

The Canadian dollar is looking for a new direction, with many moving parts. The team at TD lays down the 3 risks:

Here is their view, courtesy of eFXnews:

The recent bump in USDCAD is consistent with the lift in shortterm rate differentials.

The 2y US-CA spread sits around 43bp. Historically, this level has been consistent with USDCAD at 1.36 leaving it at a steep discount to one of its key cyclical drivers. The broader improvement in risk appetite has probably insulated CAD to some degree. However, we also think the market is pricing a small Trump premium on the greenback. Even so, positioning data shows a large buildup in CAD long exposure. IMM data has seen net long CAD exposure over the past six weeks, and long exposure is approaching the highest level since mid-2016. Our sentiment indices show CAD with the largest buildup in long exposure over the past 3 months.

We think this leaves CAD vulnerable to a mix of 1) SOTU 2) stronger US data and 3) BoC risks. The upside break of the 1.3130 level opens up a test of 1.3250.

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