United States President Donald Trump dominated the headlines last month and his first major press conference, inauguration speech and Wall Street Journal interview were all triggers for a broad US dollar sell-off.
BNZ currency strategist Jason Wong said in a financial note Mr Trump, in an non-politician-like manner, set about doing exactly the things he promised before the election, something many had feared.
Mr Trump’s statesman-like, conciliatory election night speech was soon forgotten as he reverted to his natural, unorthodox way of doing things — putting diplomacy to one side and agitating global leaders and a lot of the general populace in the process.
The strength of the US dollar in December was fully unwound as the currency trended lower through the month and the market digested Mr Trump’s talk and actions.
The US-dollar major currency trade-weighted index ended the month about 3% lower.
"Trump talked of a ‘too high’ US dollar, kicked off the process to build a wall between the US and Mexico, cozied up to the United Kingdom at the expense of the US relationship with the European Union, talked tough against any US company that dared to move operations outside the US and signed an executive order on a travel ban for citizens of seven Muslim-dominated countries, among other things."
In financial markets, the Trump-dominated headlines had more impact on the US dollar than equities or bond markets, Mr Wong said.
Many global equity markets made fresh highs during the month. The Volatility Index fell to its lowest level in two and a-half years while US treasury bonds showed signs of consolidation after the major sell-off in the December quarter.
Signs of improved global growth helped support risk appetite, he said.
Citigroup’s G10 economic surprise indicator hit a six-year high, suggesting a much better-than-expected flow of economic data. The rise in the indicator was broadly-based.
Data showed the euro zone growing above trend, the UK economy performing well post the Brexit referendum, the US economic expansion continuing and China growth indicators recovering. JP Morgan’s global Performance in Manufacturing Index rose to its highest level in three years, Mr Wong said.
For New Zealand, there was not much happening locally to drive markets. Average dairy prices fell by almost 4% in the first GlobalDairyTrade auction for the year. That marked the start of a possible consolidation phase for dairy prices after their strong run in the second half of last year.
Consumer Price Index inflation moved up inside the Reserve Bank’s 1% to 3% target range for the first time in more than two years, rising by 1.3% annually in the December quarter.
An average of six core inflation measures showed a compelling increase in core inflation was under way, he said.The track for the New Zealand dollar was a steady climb upwards, largely driven by the weaker tone set for the US dollar. Stronger risk appetite meant the New Zealand dollar was one of the top-performing major currencies for the month.
Part of the New Zealand dollar strength could be attributed to its unexplainable weakness in December. Last month, Mr Wong noted the dollar weakened against three positive drivers, setting the scene for an early-2017 recovery.
QUICK OUTLOOK
● NZD/USD: Recovered from an oversold level in January and the path from here is more likely one of consolidation. Resistance expected around US74c.
● NZD/AUD: Stuck in a trading range environment where A94c to A97c looks about fair for the months ahead.
● NZD/GBP: Invoking Article 50 by the end of the first quarter would put the spotlight on Brexit risks. Uncertainty should mean United Kingdom growth subsides. The dollar should be steady to higher in coming months against the pound.
● NZD/EUR: E70c remains a threat in coming months as political risks intensify in the region. The Dutch general election in March and France’s presidential election in April-May are the next focal points.
● NZD/JPY: Consolidation in bond yields will help the yen consolidate in coming months. That should mean the dollar/yen range trading in the low Y80 range.
