The US dollar trade is slowly evolving into a bet on Washington and its ability to deliver a tax cut. USD was the top performer while NZD lagged. Japan manufacturing PMI from Nikkei is up next. After closing the USDJPY short yesterday w/ 185 pip-gain, 6 trades are currently in progress (all in green) 2 in FX, 2 in indices 2 in metals.
Ray Dalio+ the head of the world’s biggest hedge fund, wrote on Monday that markets are more sensitive to politics than any time in our lifetimes. We see it every day in the way that political headlines have more impact than economic data.
A big part of Tuesday’s USD rally was the increasing sense that Trump is morphing into a classic Republican, something we warned about to start the week. It began with the ouster of Bannon on Friday and continued with the embrace of the war in Afghanistan. If markets conclude that he will be more like George W. Bush than Candidate Trump in the rest of his term, then the implied FX impact could be the one Ashraf warned about 7 months ago here.
Ultimately, markets are concerned with the bottom line — A shift to the center from the President could help to break the gridlock in Congress. That would lower the temperature and raises the odds of tax reform. In the meantime, the US dollar trade will be increasingly tied to the likelihood of success. Tuesday’s climb was a small step as it remains at vulnerable levels, particularly USD/JPY.
Another spot to watch in the day ahead is GBP/USD. The July low of 1.2811 is pips away after another slump. $1.2770 is the take-out target for the bears.
Looking to Asia-Pacific trading, the main release on the calendar is the August preliminary Nikkei Japan PMI. The prior reading was 52.1. Later, Markit is out with services and/or manufacturing data for France, Germany and the US as well.
