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The US Dollar sold off on Tuesday after US CPI came in on forecast and President Trump fired Rex Tillerson and appointed Mike Pompeo as Secretary of State. Westpac’s FX model continues to advocate for Dollar longs, against the market consensus. Scotiabank expects the Euro to remain supported as Italian election concerns are absent for now and buying appetite is gradually returning.

Tillerson is Toast: Woes continue for the Canadian Dollar

On an eventful Tuesday, there were plenty of interesting events for markets and it transpired to create a weaker USD and a mini-collapse in the CAD.

The obvious economic headline on the day was US CPI (inflation data) picking up to 2.2% YoY as expected. This was clearly not much help to the US Dollar which sold off quite promptly after the report was released.

There was yet more bad news to come, however, as it was announced that Rex Tillerson, the US Secretary of State had been fired by President Trump.

Stock markets didn’t appear to like this move very much and fell from daily highs to heavy closes with the Nasdaq, in particular, losing 1.3%.

The replacement, Mike Pompeo, is viewed, to put it politely, as considerably more “hawkish” on matters of foreign policy and thus there is clearly a tinge of risk off to his appointment.

The big loser as a result of Tillerson’s departure was the Canadian Dollar as USD/CAD soared to 1.3950.

The combination of a more dovish Poloz and NAFTA worries had been hurting the Canadian Dollar and now it seems even more political uncertainty is going to ravage the Loonie.

Looking at USD/CAD you could be forgiven for thinking that the Dollar had a strong day, but EUR/USD and GBP/USD were both strong performers.

The Japanese Yen continues to trade more softly, as a political scandal is unnerving some investors as it seems like there is a chance that major politicians could be involved and Abe has said he will resign if he is found to have had any involvement.

Westpac model continues to buy US Dollar (USD) exchange rates

The situation in the US grows more confusing day by day, and as a result, everyday investors are probably finding it quite difficult to keep track of what is moving FX markets.

In the United States it is no longer interest rates which are driving the US Dollar, instead, it is the deficit which is the focus.

Most major funds and analysts are quite bearish the USD, as they see Trump’s fiscal stimulus further ballooning US debt.

America First is widely believed to mean a weaker Dollar, but there are still some out there who are ready to advocate for a stronger Dollar. The FX prediction model at Westpac is one such example of this, as the system is still buying Dollars and selling the NZD,

“Despite a soft update on US average hourly earnings last week the model want to increase its USD long, to an outsized 28%. The model opens a contrarian CAD long, albeit tentative at +3%, a still decent growth signal and a turnaround in our yield signal the main catalysts following last week’s decent jobs and cap utilisation data. NZD remains deeply out of favour (-23%), the latest trigger coming from weaker NZ dairy futures prices via our short-term logit based macro momentum signal.”

In Europe, there are also some political worries stirring, and while the UK-Russia standoff continues over the poisoning of a former double agent in Dorset, the Italian election result has been largely ignored.

There are some positive signs that investor appetite for the Euro might be returning, even with clarity some weeks off as to how a government might take shape.

Forex strategists at Scotiabank believe that incoming flows should keep the Euro elevated while risks from Italy remain subdued,

“Italy is still sorting through the outcome of its general election but today’s BTP bond auction was relatively well-received… suggesting investors are comfortable with political risk prospects. We note recent trends in Eurozone net portfolio and investment flows suggest that international investors are slowly but surely returning to European markets which we expect to provide the broader underpinning for the EUR”

Best Euro to lira Exchange rate as EUR/TRY hits all-time highs

A weaker Dollar is great news for emerging markets, but there was another notable laggard alongside the CAD on Tuesday.

The Turkish Lira is now at historic lows against the Euro (see EUR/TRY chart here) and has also broken out against the Dollar to yearly highs.

Some view currencies like the TRY as “canaries in the coalmine” and as such a bout of weakness could be indicative that we are heading towards a more pronounced period of risk off.


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