US Treasury Secretary Nominee Talks Down Strong Dollar

Analisi Giornaliera - 24/01/2017

Steven Mnuchin Echoes Trump Statements on Dollar

In a stunning turn from the steps of his predecessors to ensure a stronger dollar, US Treasury Secretary Nominee Steven Mnuchin’s written statements to members of congress highlighted the negative short-term implications of such a development.

Dollar Dumps After Treasury Nominee Responds

Confirming the Trump administration’s stark departure from Clinton-era policies to achieve a stronger US dollar, Treasury Secretary Nominee Steven Mnuchin’s written responses to Senate questioning brought about an unexpected response. Unlike Timothy Geithner and Jack Lew who predominantly focused on external currency manipulators such as China, Mnuchin mirrored Trump’s sentiment that the dollar was too strong to be competitive, potentially bringing about near-term shocks. Although he confirmed that long-term strength was vital, short-term, the impact could be highly detrimental to economic activity. However, Mnuchin still faces an uphill battle with Democrats fighting his confirmation amid revelations that he has extensive offshore investment holdings. The reaction in the dollar was notable following the remarks, with GBPUSD taking a further climb before reversing course lower overnight.

Trump Withdraws from TPP

In a largely foreseen development, US President Donald Trump signed an executive order on Monday to withdraw from the Trans Pacific Partnership. The trade pact, which was largely viewed as giving corporations too much power over trade and governance, was a huge target of Trump’s rhetoric during the campaign trail, with the move immediately winning him support from American labor unions.

The idea behind the TPP was to open trade between 12 nations along the Pacific Rim while marking the largest trade pact of its time. However, hang ups on the ability of corporations to take legal action against sovereign countries that constrained the ability to do business was roundly viewed as negative from many points of view. The reaction following the decision alongside proposed NAFTA renegotiation has been enough to see USDMXN rebound modestly from Monday’s losses after weakening following Mnuchin’s dollar views.

Japanese Factory Growth Hits Multi-Year High

Preliminary manufacturing figures for Japan reported by Nikkei showed that the sector’s purchasing managers’ index rose to 52.8 in January from 52.4 in December, marking the highest point in 34-months. Besides helping to cement a strong upward trend in the index after experiencing a period of contraction from March to August, many components of the index strengthened significantly. In particular, new export orders increased at the fastest pace in a year, helped in part by a weaker Yen that has helped add competitiveness to the Japanese export economy.

Besides highlighting strengthening global trade, it suggests that exports from Japan are experiencing a serious pickup in demand. Although concerns about inflation continue to linger, the manufacturing gains could signal a turning point in economic activity as expansion accelerates. USDJPY fell following the Mnuchin remarks, only to rebound in overnight trade following the preliminary PMI figure.

French Services Sector Accelerates as Manufacturing Tapers

In another sign of improvement for the French economy, preliminary figures for January manufacturing and services activity remained firmly in expansionary territory. The Markit Economics Services Purchasing Managers’ Index rose to 53.9 in the latest reading, reaching the fastest pace of growth since June of 2015.

By comparison, the Manufacturing PMI saw expansion decelerate modestly to 53.4 from 53.5 in December. Despite output growth tapering, the real gem in the report was the better than expected hiring pressures as policymakers contend with one of the highest rates of unemployment across the Euro Area. The services sector also showed robust job creation, adding to the sense of optimism that the economy is gradually recovering from tepid growth over the last few years. After climbing modestly on Monday, the French CAC 40 is weaker following the PMI results as the uncertainty surrounding Trump adds to investor anxiety.