EUR/USD is more sensitive to Donald Trump’s tweets than to macroeconomic statistics in 2018

 

What game is the U.S. president playing? Donald Trump didn’t mince words and threatened China regularly; and the U.S. administration had to make amends after that and calm down the financial markets by the announcements that there wouldn’t be a full-scale trade war, and the opponents would settle down any conflicts by negotiations. In April, the U.S. president accused Beijing and Moscow of competitive currency devaluation, while Washington was increasing the rates. That’s unacceptable! At the same time, the U.S. Treasury Department hasn’t been calling China the currency manipulator for eighteen months in a row, and the reasons for the ruble crash should be found not at all in the Russia’s wish to devalue it. But for Uncle Sam, the USD / RUB rapid rally could not have been a dream.

 

According to ING, Donald Trump’s criticizing his opponents for competitive devaluation is a hidden verbal intervention. It is far easier to accuse your wife of having a lover if you have a lover yourself. You messed things up yourself (as in the case with the Russian ruble), and you actually did take offense yourself. Another attack on China looks grotesque as well. Doesn’t matter that yuan has grown 3.5% stronger against the U.S. dollar since the beginning of the year, and 8.7% stronger for the last twelve months? China is as quiet as lamb, going on buying out Treasuries despite the trade conflict. In February, its holdings of Treasuries stockpiles increased by $8.5 bln, up to $1.18 trillion. Long-term bonds purchases amounted to $15 bln; however, due to the assets price fluctuations (10-year yields are 16 bps higher, at 2.89%), the final figure was almost twice less. In total, foreigners bought the U.S. bonds worth $43 billion in February, which allows stating the second month of capital inflow to the USA in a row.

 

Dynamics of Chinese holdings of U.S. Treasuries

Source: Financial Times

 

Anyway, there was some truth in Donald Trump’s last tweet: Washington goes on increasing the rate. According to the minutes of the FOMC meeting in March, no central bank’s plenipotentiary expressed concerns about deflation, that hasn’t occurred since 2012. Human psychology is that the absence of fear allows acting aggressively. Even the Fed’s major dove, Minneapolis Fed’s president Neel Kashkari, who voted against all of three rate hikes in 2017, is now claiming that the fiscal stimulus makes him more confident in reaching the inflation target of 2%.

 

Dynamics of the FOMC concerns about deflation

   

Source: Wall Street Journal

 

Anyway, in the world, where Donald Trump’s tweets are more important than macroeconomic statistics and the central bank’s monetary policy, it’s difficult to expect that monetary restriction will strengthen he national currency. Especially since the U.S. president wouldn’t like that. The game “excite the market and the people, supporting you, will calm it down” goes on. EUR/USD bulls perfectly understand that and are pushing the pair towards the resistances at 1.243 and 1.2455-1.247 even without the help of euro that is not so successful in 2018.


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