Equity markets throughout Asia and Europe have continued the run off positive momentum seen in the US trading session yesterday, where both the S&P 500 and NASDAQ closed at record highs. As we edge towards the conclusion of January 2017, all of the major equity markets look on track to conclude the month positively with the exceptions of the Dow Jones Index, Tokyo Stock Exchange and the Nikkei.
The strength in the Nikkei can be largely attributed to the exceptional demand for the Japanese yen last week when investors became concerned over what the upcoming “America first, and always” rhetoric might actually mean for the global economy and financial markets.
As you would expect and with it still being less than one week since it became official, all of the major news headlines surround President Trump and what he has been up to following the official inauguration. His first two days in office have certainly been busy when it comes to news developments, including the announcement of withdrawal from the TPP deal, clearing the way for the controversial oil pipelines and repeating the commitment towards building the wall with Mexico which should be disclosed further during a meeting on National Security scheduled for later today.
While the Mexican peso has weakened on the announcement, the losses are so far not to the extent that the markets might have anticipated and the USD/MXN is still below the historic highs seen earlier in the month.
Emerging Markets:
Elsewhere I am keeping an eye out for the emerging markets currency space, especially as it is these assets that are seen as being among the most vulnerable to Trump’s protectionist promises. The Turkish lira has weakened slightly during trading today, following the surprise decision from the Turkish Central Bank to leave monetary policy unchanged on Tuesday.
While there is no doubting that the Turkish Lira is in complete freefall and continuously plagued by a range of different factors that have continuously destroyed the currency in the past, leaving policy unchanged as the central bank did yesterday might not be so negative when taking into account what playing hot-potato with policy can do to your currency – aka Russian ruble December 2014 flashback.
Speaking of the Ruble, the Russian currency is still on track to maintain its position as one of the strongest currencies in 2017 although I personally believe that this has far more to do with the price of oil maintaining itself above $50 rather than because of any reported friendship between Trump and Putin.
One heavy sufferer since Trump won the US election has been the Malaysian Ringgit, with the USD/MYR trading around 4.44 today after the Ringgit reached milestone lows not seen since the Asian financial crisis around 1997/98. When it comes to Malaysia and its Ringgit, it is important to note that the currency is particularly sensitive to the foreign ownership of government bonds and this means that a clearer picture of the real US interest rate outlook in 2017 is required before deciding whether a rebound is ahead.
GBP/USD:
The GBP/USD has managed to extend to a 6-week high above 1.2597 following the psychological close above 1.2350 to conclude trading last week. This pair is now in a recovery phase in the eyes of technical traders. The ongoing indications that the Brexit process is going to be incredibly prolonged and that Prime Minister Theresa May will continue to face opposition just two months before her own deadline to invoke Article 50 should provide support to the British pound.
It is however important to note that as long as the technical peak remains in place marginally below 1.28, we are still caught in the longer-term downtrend from the historic lows seen during the historic EU referendum.
EUR/USD:
The Eurodollar is attempting to maintain its ground above 1.07 after benefiting from the significant round of unwinding USD positions last week. It’s important to be aware that it is technical possible that the EUR/USD might attempt to reach an eventual target at 1.0850, however this is on a medium term basis based on further USD unwinding and the heavier risks are to the downside following a significant recovery over the past month.
EUR/GBP:
The EUR/GBP is continuing to trend lower and reversing away from its 2-month high seen earlier in the month when Hard-Brexit fears were the theme of the currency markets. Any further indications that the Brexit process is going to continue being pushed back and that Theresa May will remain under pressure to invoke Article 50 before the end of March should provide the catalyst towards the reversal continuing in the near-term.
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