By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The U.S. dollar traded heavy throughout the North American session even as it only ended the day lower versus the Japanese yen and Australian dollar. With no U.S. economic reports released Tuesday, the back and forth in U.S. rates prevented any meaningful moves in the currency as the greenback recovered slightly against the euro, Swiss franc and New Zealand dollar. The dollar is marking time before U.S. President-elect Donald Trump’s press conference on Wednesday. As you know, the rally in U.S. stocks and the U.S. dollar was driven entirely by Trump’s promise for tax cuts and big spending. In his first press conference since July -- and first official news conference since being elected President -- Trump will most likely repeat everything that he previously vowed to achieve while giving little details on specific policy actions. The question then becomes how the markets will react -- will they be disappointed by the lack of specificity or encouraged by his pledge to spend. Considering that he could be peppered with questions on tax reform, conflicts of interest, Russia’s interference, Obamacare, trade and other market-moving topics, there’s no doubt that investors will be on edge. But at the end of the day, the incoming President could help more than hurt U.S. markets by simply repeating at every opportunity “he’s going to make America great again,” -- the same tagline he used throughout his campaign. For the time being, the market and the Fed continue to believe that Trump will deliver a major fiscal-spending package and until there’s reason to suggest otherwise, dips will remain shallow.
Meanwhile, we have been watching the British pound closely and after 3 attempts to move below 1.21, GBP/USD so far has been able to withstand all the selling. Although the prospect of a hard Brexit hangs over the currency, the ebbs and flows of negotiations have a long way to go and any upside surprise in data could create a squeeze in cable over the next few days. With that in mind, Wednesday’s calendar brings the UK's trade balance and industrial production and GBP's sharp sell-off and the uptick in manufacturing activity should go a long way in boosting trade activity. We saw that in the Eurozone and should see it in the U.K. as well. Good news should cement a near-term bottom for GBP.
Euro, on the other hand, treaded water in an otherwise choppy trading day. The only piece of data Tuesday was French industrial production, which posted a sharp rise of 2.2%, beating the 0.5% forecast. With little catalyst for the day, the euro was confined to a tight trading range, taking a brief peek above 1.06 before finding resistance. Although French data is not overly market moving, it does continue the recent string of stronger-than-expected inflation data coming out of the Eurozone. There are no major economic reports scheduled for release from the Eurozone on Wednesday.
Interestingly enough, Tuesday's worst-performing currency was the New Zealand dollar and one of the best-performing was the Australian dollar. This divergence translated into sharp gains for AUD/NZD. There were no economic reports from New Zealand but Australian retail sales came in weaker than expected, showing an increase of 0.2%, slightly weaker than the 0.4% increase expected. Chinese CPI also disappointed, missing expectations, showing a 2.1% vs. 2.2% expected. However the CPI miss was offset by better-than-expected increases in PPI data. Chinese PPI rose by 5.5%, far better than the 4.6% forecast for December. The Canadian dollar fell slightly despite stronger housing starts, which surprised to the upside with data showing 207.0k new homes in December versus 190.0k expected. Canadian building permits also reported a smaller-than-expected decline of 0.1%, out-performing the expected decrease of 6.0%. Yet oil prices continued to fall, weighing on the Canadian dollar. Oil inventories are due for release on Wednesday.