The US dollar is rising against all the major and emerging market currencies today. The signals from the White House suggest strong pressure will be exerted on Canada to sign on to NAFTA 2.0 or risk losing part of its auto sector, which of course is primarily the production of US brands. At the same time, the US is in no mood to negotiate with Europe or China. This stance seems to ensure trade tensions will rise and stay elevated until at least after the mid-term elections.
The pressure on several emerging markets is also unlikely to be alleviated in the near-term. Argentina hiked rates, and the peso fell. Turkey is reluctant to hike rates, where the key rate is less than a third of Argentina's, and the lira fell. The South African rand is leading the emerging market currencies lower today with more than a 1% loss. The Turkish lira also remains under pressure.
The US policy mix and interest rate differentials draw the world's savings. This also won't change any time soon. Indeed, President Trump indicated he is considering indexing capital gains taxes to inflation, which would be tantamount to a tax cut. Not only is the full impact of the tax reform and increased spending still working its way through the economy, but additional tax cut may be delivered, including making the middle-class tax cuts permanent. Meanwhile, monetary policy will continue to become gradually less accommodative.
The policy mix helps boost the economy and better able it to withstand the headwinds of trade tensions. The policy mix, trade tensions, and emerging market pressures individually and collectively strike us as macro-forces driving the dollar higher.
The Bank of Japan sent a clear message to the market today to dampen ideas that it is engaged in so-called "stealth tapering." Although it reduced the number of times it will purchase bonds last week, today it increased the amount of shorter duration bonds, It increased the amount of 1-3 year bonds it will purchase from JPY200 bln last month to JPY250 bln this month. Similarly, it will buy JPY350 bln of 3-5 year bonds, up from JPY300 bln in August. The market responded by slightly steepening the yield curve....
...MUCH MORE
