Since the beginning of the week, the US dollar has consolidated losses against most of its peers. However, it seems that this period of is over as investors have started to sell the greenback once again. On Wednesday, the yen rally resumed with USD/JPY breaking the 110 support to the downside. Once again, this move is rather due to a broad US dollar weakness than a positive surprise from Japan. The greenback is extending losses not just against the yen but also against all G10 currencies as investors anticipate the negative effects of Trump’s last announcement in term of trade policy.
Market participants have turned a blind eye on the improving interest yield differential between the USD and its peers and rather focused on rising protectionism in the US. Indeed, the incentive for traders to hold the USD has improved consistently since the beginning of the fourth quarter last year but investors were unimpressed. This is especially true for the Japanese yen has the 2-year yield differential has slipped continuously, reaching -2.19% this morning, compared to -1.50% in mid-September. In spite of this clear incentive for investors to hold the greenback, investors are rather focus on political developments in the US, ignoring even the persistent surprise in US economic data.
Indeed, since the beginning of October last year, the US economy has kept sending strong positive signals but it didn’t led to a dollar rally neither. All the economic sectors have exceeded median forecast with business cycle indicators and the housing and real estate market leading the charge.
In short, investors are just waiting for the dust to settle on trade policy and once investors will get better clarity, we may again see rising interest for the USD.
By Arnaud Masset