The Trump trade continues to unravel as the new Administration picks at the low-hanging fruit of protectionism and leaves the harder, more positive agenda of tax reform, deregulation and infrastructure spending to a later date. Investors are becoming increasingly concerned that this delay likely means dilution of Trump's election promises.
So far this environment has primarily led to a weaker USD, with G10 commodity currencies being spared investor concern about protectionism. Part of this price action is due to positioning, but is also the concept of the US engaging in a currency war rather than a trade war, and the former is having a benign impact on sentiment.
We think that the US administration's ability to impact on the USD is limited, however, especially while the Fed remains independent and on the path of rate normalisation.
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As such we continue to be in favour of buying USD dips and remain short EUR/USD*. The pair remain driven by external factors such as risk sentiment and Fed rate expectations, especially as the ECB once again made it clear that accelerating headline inflation is not impacting the policy outlook as long as core inflation remains muted.
The Antipodean currencies remain standout performers and are outperforming their local rates markets. While the RBA and RBNZ will remain on hold next week, both central banks will be hard pressed to prevent further strength in their currencies without external factors coming into play. This is especially the case for the RBNZ, which will likely admit that rate hikes are closer than it thought back in November. So AUD/NZD could head lower next week.
In the UK next week’s main focus will be on the final vote on the Article 50 bill in the House of Commons, from which we expect no surprises. This comes after the government released its white paper. With this week’s BoE inflation report suggesting that the central bank will continue to look through increased upside risks to inflation in order to keep rates stable and as Brexit related uncertainty continues or even intensifies with the start of actual negotiations with the EU, we believe GBP will stay a sell on rallies.