Good morning,

Trump back on trade

The US dollar is continuing to recover some of its Trump inspired losses that comments released on Tuesday morning had caused. The latest positive impetus has been two-fold, one political and one economic.

The opposition of Trump to the current status quo of international trade is well reported but remains poorly understood courtesy, as with many things, of the lack of detail and nuance in his speeches or discussions on the matter. NAFTA, or the North American Free Trade Agreement, is a deal that allows for free and easy trade between the US, Canada and Mexico and while the bigger guns are focused on what Trump does with Chinese trade, the argument around Trump’s options for NAFTA took centre stage yesterday.

China can fight back

There are many facets of Trump’s trade policy that ape the characteristics of a schoolyard bully and as with any bully they do not pick on people that can fight back but the weaker kids. China can fight back, who holds the majority of US debt. But Mexico is not as powerful and we think that Trump will pick the easier fight.

Yesterday it was reported in the Canadian press that Trump will reopen talks on NAFTA within a few days of tomorrow’s Inauguration ceremony, causing the USD to strengthen and both the Canadian dollar and Mexican peso to lose ground through the session.

Yellen continues hawkish notes but caveats remain

The 2nd impetus came from the Fed with Janet Yellen reiterating her recently more hawkish pronouncements. Speaking in San Francisco, she told reporters that “it is fair to say the economy is near maximum employment and inflation is moving toward our goal,” and that while “it makes sense to gradually reduce the level of monetary policy support,” the timing of the next interest-rate increase “will depend on how the economy actually evolves over coming months.”

She also noted that “I and most of my colleagues” were expecting last month to increase the benchmark lending rate “a few times a year” through the end of 2019. A lot of this still needs to be viewed through the prism of any fiscal stimulus from the new President and the impacts, positive or negative, on US growth from trade policy.

Trump’s nominee for Commerce Secretary Wilbur Ross echoed a lot of Trump’s noises on tariffs yesterday within his confirmation hearing. “We would like to have our trading partners also practice free trade,” Ross said. U.S. companies can compete in “a fair fight,” he said, but “in a lot of cases, it is not a fair fight.” There is an overwhelming expectation that he will be confirmed to the role.

Positivity in sterling short lived

Sterling took a back seat yesterday and almost all of the GBP exuberance that ran markets on Tuesday has dissipated. As we noted yesterday, this is of little surprise to us as we wait for the economic shoes to drop from lower growth and higher inflation. The pound may have to rely on tomorrow’s retail sales announcement for a pre-weekend perk up. Yesterday’s jobs market data showed a stagnation in hiring and wage improvements.

The Day Ahead

Inflation concerns will be the order of the day at today’s ECB meeting in Frankfurt. European Central Bank President Mario Draghi committed to an extension of quantitative easing in December but recent jumps higher in inflation, especially in Germany, may see him have to call price risks ‘broadly balanced’. We anticipate no change in policy and a softly-softly approach from the ECB President that limits euro volatility. He speaks at 13.30 GMT. Elsewhere, the data calendar is quiet.

Have a great day

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