USD-positive sentiment to remain in place for now - Commerzbank

The turmoil on FX markets that had been feared as a result of Trump’s election as US president has not materialised and even a Fed rate hike in December is still being discounted, said Esther Reichelt , analyst at Commerzbank. Currency markets are ignoring political uncertainty, initially focusing on fundamental issues. At present, there is a lot to argue for the USD-positive sentiment to remain in place for now.

Key Quotes

“Reactions on financial markets ahead of the election have been misleading. If, during the election campaign, the prospect of Donald Trump winning the election appeared to be rising, the USD suffered losses. This was in line with the subsequent fall in Fed rate expectations. And the first reaction on currency markets when, at around 3am (CET), it gradually turned out that Trump would be the winner, also fits into this picture: The dollar depreciated as did traditional risk currencies, while safe havens such as the yen gained. But it all changed shortly afterwards. Within the next few hours, exchange rate moves corrected, with the US dollar even gaining on a trade-weighted basis.”

“Obviously, the market quickly arrived at the view that it all would not turn out as bad as feared amidst the general electioneering bluster – or the announced ultra-expansionary fiscal policy might even be good for the economy and the dollar. Against this backdrop, the exchange rate levels reached in the wake of the initial market reaction offered good entry levels which investors utilised and thus triggered the correction. While it is still unclear what exactly President Trump is up to, certainty in this regard is not to be expected before he takes office on 20 January 2017. For now, the currency market is likely to refocus on traditional fundamental arguments.”

“And the next major event on the agenda will be the Fed's interest rate decision on 14 December. Interest rate expectations have even exceeded pre-election levels – particularly with regard to 2017. Thursday's inflation figures for October are unlikely to stand in the way of a rate hike, especially given that long-term inflation expectations came in higher as well. Hence, there is a lot to argue that the USD-positive market sentiment will remain with us for now.”

“The very long-term risks potentially emanating from US policy under Trump do not matter on the currency market at the moment. But a more aggressive Fed appears to be on the cards – while both the European and Japanese central banks keep retaining their dovish bias.”