Good morning,

Trump trade continues

Actual and political earthquakes and their aftershocks continue to knock markets as we open up this week. A strong second earthquake hit New Zealand overnight and the Kiwi dollar is the worst performing currency in the G10 this morning with US dollar strength a big part of the Trump Presidential landscape.

The transition of Trump has largely focused on political factors – immigration and reproductive rights mainly – and while we are longer term bulls on the USD courtesy of the new President’s likely policy mix and thereby the impact on inflation, we have to think that any upside is likely to be choppy. There is still an absolute chasm of uncertainty that markets must traverse however and therefore we must feel that gains will be covered up and banked pretty quickly.

For now the old saying of buying dollars and wearing diamonds is holding true.

Sterling holding up for now

A similar feeling is running through sterling crosses which, very quietly, had one of their best post-Brexit weeks last week. As we outlined last week there is a certain element of relativity here; markets still believe Brexit to be a negative and further shocks and downside to the UK economy is likely however the new fresh threats remain Trump and a possible increase in anti-EU, pro-nationalist policy in Europe. Hence GBP’s gains against the USD and EUR in the past few sessions.

Similarly we expect gains to be banked quickly; GBPEUR could make it as high as 1.17/18 with GBPUSD back towards 1.28 but it takes one political faux pas now for focus to shift back on to sterling and gains will evaporate. This week sees the latest run of UK inflation tomorrow ahead of Mark Carney’s latest testimony in front of the Treasury Select Committee 30 minutes later. Issues of his continued tenure as Bank of England Governor as well as the details of the changes in the forecasts to the Bank’s Quarterly Inflation Report will dominate.

Asia remains the investor focus

USDJPY has continued close to our 108 target in the short term courtesy of the latest round of GDP news from Japan. GDP rallied to 2.2% on an annualised basis in Q3 as exports added nearly 63% of that growth. The lacking factor however was the deflator which fell to -0.1% and therefore shows that the Japanese economy while growing well is not in a strong enough position to start creating inflation in meaningful or consistent manner.

The news will come as a slight relief to the Japanese government who may well be worried that a trade deal that has been at the centre of their economic policy is put in danger by the rise of President Trump.

USDCNH continues to rally to fresh record levels on the EM sell-off post the US election despite what looked like a dab of intervention from the Chinese authorities on Friday morning. We maintain our stance of a run to 6.90.

Have a great day

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