Dollar Horse Left Out

The three market horsemen of the Trump election win were rising stocks, rising yields and a rising US dollar but suddenly USD is left out; we look at why. The pound was the top performer Wednesday while the Australian dollar lagged. New Zealand is in focus with CPI out and Wheeler to speak; Australia is closed for holiday. GBPJPY was once again stopped out, leaving  5 Premium trades in progress. We are carefully watching the latest 2 days in gold and silver before a new trade is released.

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The market is gaining confidence in Donald Trump's agenda but it isn't materializing into US dollar strength. The S&P 500 hit a record high for a second consecutive day in an 18 point rally to 2298. The Dow also finally broke 20,000. In the bond market, the 10-year yield rose 5 bps to 2.51% after a weak 5-year auction.

That's the sort of recipe that would normally give the US dollar a boost but it was just the opposite. USD/JPY fell a half-cent on the day, while the pound and loonie each gained about a cent against the dollar.

Part of the reason is that US yields haven't risen in a vacuum. Global yields are moving higher with most benchmark yields near the highest in a year. Markets suddenly believe that a new, higher combination of inflation and growth is near. That's mostly based on hope and expectations of government spending because signs in the data are still scant.

What's curious is that the US is undoubtedly on the front end of that trend. The Fed is already in a hiking cycle and fiscal spending in some form is coming. So the dollar should be climbing.

The reason the dollar might be struggling ties back to yesterday's IMT: International confidence. Parts of the market are warming up to Trump but the past two days of S&P 500 gains were on low volume. There is a disbelief in Trump, if not a disgust/exhaustion from international investors. In separate comments on immigration Wednesday he pledged to build a wall and to halt arrivals from parts of the Middle East. At the end of the day, likeability is still a factor.

What we don't want to miss is the short-term upside. Protectionism and wasteful spending are long-term drags but in the short term Trump has some powerful tools to boost growth at home. That's a dollar positive. So while the market is in denial in the short-term, higher rates, stocks and growth will eventually filter through.

At the same time, we remain watchful of data, especially inflation. New Zealand released Q4 numbers early in Asia and the showed a 0.4% q/q price rise compared to 0.3% expected.