Mnuchin Sinks the Dollar, How will Draghi and the EUR Respond?

Earlier in the Day:

Economic data through the Asian session this morning was limited to New Zealand’s 4^th quarter inflation figures. New Zealand consumer prices rose by just 0.1% quarter-on-quarter in the 4^th, falling well below a projected 0.4% rise, with the rate of inflation slowing considerably from the 3^rd quarter’s 0.5%. Things were not much better year-on-year, with the annual rate of inflation slowing to 1.6%, below a forecasted and 3^rd quarter 1.9%.

While fuel prices surged 6.1%, a slump in retail prices attributed to heavy discounting pegged back any hopes of a pickup in price pressure, which is now expected to leave the RBNZ in neutral until next year, with the markets having priced in a rate hike later this year.

The Kiwi Dollar slumped from $0.74243 to $0.73361 upon release of the numbers, before recovering to $0.73728 at the time of writing, a gain of 0.52%, all of which has come off another U.S Dollar sell-off.

Elsewhere, the Yen was up 0.21% to ¥108.99 against the Dollar, with the Yen last at ¥108 levels in early September of last year. Things were not much better for the RBA, with the Aussie Dollar rallying 0.41% to $0.8095, with Aussie Dollar strength likely to be an unwelcome gift for members at the next meeting.

In the equity markets, it was a sea of red, with the Nikkei leading the way down, dropping 1.13% by the close, the current week’s 1.75% upside in the Yen weighing on export stocks, with the CSI300 and Hang Seng down 0.08% and 0.19% respectively.

The negative sentiment through the session attributed to the slump in the U.S Dollar and what it is likely to mean for trade terms

For the ASX200, the index closed out down just 0.08%. The declines in the ASX200 were less pronounced, with the softer Dollar supporting commodity prices, with oil and metal prices on the rise this week. The gains were not enough to offset the slide in the big-4 banks however, which pulled the index into the red.

The Day Ahead:

It’s a big day for the EUR and U.S Treasury Secretary Mnuchin certainly laid down the gauntlet at the World Economic Forum in Davos on Wednesday.

The EUR was already at levels with which the ECB was likely to be uncomfortable before Mnuchin decided to share his views on the weaker Dollar. With the EUR now sitting at levels not seen since late 2014, when the Eurozone economy was far from firing on all cylinders, there is an even greater incentive for Draghi to drag the EUR at this afternoon’s ECB press conference.

Focus will be on the ECB through the day, with this morning’s consumer and business climate stats out of Germany unlikely to move the dial barring anything materially disappointing.

While Trump may have kicked off a trade war, Mnuchin may have just started another currency war. How far Draghi is willing to go, without spooking the markets remains to be seen, but some rhetoric on the likely negative effects of a stronger EUR on the economy and the outlook towards monetary policy would help, as would categorically removing any hint of the ECB being willing to review its policy on deposit and interest rates.

We’re certainly in for an interesting press conference, with the EUR up 0.33% to $1.2449 at the time of writing. Can Draghi bring the EUR back to at least $1.22 levels by the end of the day? It’s going to be a challenge at best.

For the Pound, the stellar run continues with the Pound up 0.43% to $1.4303 at the time of writing. The combination of a weak Dollar and positive sentiment towards a soft Brexit have driven the Pound towards the much coveted pre-EU Referendum $1.48 level.

Economic data out of the UK this morning is limited to gross mortgage approvals that are unlikely to have any influence, with the markets now focused on Davos and the U.S administration’s intent to go about its own business.

The only downside for the Pound would be from negative Brexit chatter that could lead to a shift in sentiment towards the anticipated outcome of trade talks with the EU and perhaps the UK economy going into recession, neither of which seem to be on the cards at present. In fact, the U.S administration may well have given Britain a lifeline with the increased protectionism, with the EU likely to need its trade partners more than ever before.

Across the Pond, economic data out of the U.S includes the weekly jobless claims numbers together with December goods trade figures and new home sales numbers.

The stats are going to have to be impressive for the Dollar slide to shallow, with a reversal unlikely to be on the cards today, the Dollar Spot Index down 0.35% to 88.896, levels that have not been seen since late 2014.

We may see the Dollar bulls in hiding for some time, but there may be a glimmer of hope further down the road, with inflationary pressures likely to build. U.S consumers are still heavily reliant on foreign goods. How this affects the outlook for monetary policy could shift influence away from the government. The bad news would be a more rapid fall in the Dollar. Let’s not even think about the U.S budget deficits and the effects of a more aggressive rate path on the U.S economy.