FX Update: Trump is panicking and USD is breaking up

Trading interest

• Maintaining long AUDNZD with stops below 1.0470 now for 1.0625 and eventually 1.0700
• Staying short EURJPY for 112.00 as long as remains below 119.50
• Long USDCAD for 1.3500+ with stops below 1.3240

Trump has lurched into panic mode if we are to judge from yesterday’s remarkable string of developments. Sources in the White House suggest that the administration is readying a payroll tax cut as a relief measure if growth shows signs of faltering – sheer insanity, given the momentum in rising deficits already in place from Trump’s prior tax cut round. Other stories circulated that the White House is studying whether there is a way to cut capital gains tax without Congressional involvement (surely unconstitutional?), and that Trump thinks data are purposefully being manipulated to make him look bad. The peripatetic POTUS also took to Twitter to lambaste the Fed and say that Powell should cut 100 basis points and “perhaps [add] some quantitative easing as well.” The Fed will get there, but at what pace? Somehow, the market thinks there are only 18% odds that we see a larger than 25 basis point cut through the September 18 FOMC meeting. If the USD breaks higher here and holds, this should quickly be adjusted to 50 and raises the risk of a between-meeting cut.

The consolidation in bond markets has only been noticeable at the longest end of the curve, and has hardly impressed. Nor has it yet pressured risk appetite in equity markets, though we are seeing signs of nerves across emerging markets, likely in part due to the stronger US dollar and China setting the USDCNY fix at a new high for the cycle, while USDCNY was allowed to touch the cycle highs overnight. As is often the case, what was formerly most popular across EM is now quite weak – USDRUB is up almost 5% since the July 31 FOMC policy mistake, USDZAR is up around 7%.

It is clear that the Fed will have to deliver and deliver big to turn around the momentum developing in the US dollar – is Powell ready to hint that the Fed will submit to the forces that will eventually force the Fed’s hand anyway (cut to zero and massive QE) or will he continue to dither? The stakes Friday are high.

Chart: USDCAD
USDCAD is backing knocking on the key resistance above the 200-day moving average and around recent highs. The economic calendar is also interesting over the next couple of sessions for Canada, as Manufacturing Sales for July are up today, and the important July CPI release is up tomorrow. A close above the resistance here with a backdrop of USD strength could quickly see the pair poking to the top of the range above 1.3500. Note the descending trendline as well.