Forget the economic data, Trump is back in the spotlight and everyone is watching his every tweet and move. Focus turned to Japan’s PM Abe and his personal “summit” with Trump. After a few man-hugs in front of the press, Abe was off for a sleep-over at Trump’s place, playing some golf, having a few dinners together and some general schmoozing like a couple of old school mates.
This followed Trump’s phone call on Friday with China’s President Xi Jinping, where Trump offered to uphold the “One-China” policy. These developments signal a more diplomatic Trump in action. After earlier accusing China and Japan of currency manipulators, there was none of that sort of talk. After his call with Xi, Trump simply vowed that the currencies of the U.S., China and Japan would soon be on “a level playing field”, without explaining what that meant. After North Korea launched a test missile in the weekend, Trump was alongside Abe and said that “…the USA stands behind Japan, its great ally, 100%”. This was certainly a different tone to the pre-election rhetoric of the US having an unfair defence agreement with Japan, allowing the Japanese to sit home and watch “Sony” TV while the US was attacked.
Trump’s dialling down of aggression towards other major countries helped drive fresh highs in US equities on Friday, with new closing highs across the various key indices, while the VIX index closed another day below 11, a sign of a risk-loving environment. As the week begins, that tone might well prevail as markets fully digest the weekend’s US-Japan summit. Currency movements were fairly modest on Friday under the circumstances, with the USD flat, consolidating the gain seen after Trump’s earlier comment on a forthcoming “phenomenal” tax reform package.
The risk-on move supported commodity prices, with Bloomberg’s commodity price index closing up 0.9% to its highest level in 7 months, driven by some big gains for metals, with zinc, nickel and copper all up circa 3-4%. Iron ore prices continued to power on up, with the Qingdao contract closing up over 3% to $86.60, a 2½ year high.
With that commodity price dynamic, the AUD was the top performer, rising by 0.6% to around 0.7675 and extending its lead in the “Top G10 currency year-to-date” contest, taking its increase to 6.5%, with the NZD a distant second at 3.7%. As well as rising commodity prices, RBA Governor Lowe’s comments on the AUD towards the end of last week and Friday’s Statement on Monetary Policy did no harm to the AUD. The RBA’s upbeat view of the Australian economy certainly doesn’t indicate it feels the need to ease policy any further, against the belief of many Australian economists.
The NZD traded in a very tight range on Friday and has consolidated close to the 0.72 mark. With our short term fair value model estimate still flirting around the USD 0.74 level, in a positive risk appetite environment, the path of least resistance might be a recovery in the NZD this week. However, the USD will be firmly in charge, with lots of US data this week and Yellen’s important semi-annual testimony to lawmakers.
The strength of the AUD has driven NZD/AUD below the 0.94 mark. This is still well within the circa 0.93-0.97 range the cross has mostly traded within over the past 9 months. The 0.93 level represents an area of strong support.
There’s not much else to say on the other crosses with little change in the EUR, GBP and JPY exchange rates against both the USD and NZD on Friday.
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