USD: Correction lower extends after President Trump’s inauguration speech - MUFG

Lee Hardman, Currency Analyst at MUFG, notes that the US dollar has continued to weaken in the Asian trading session following President Trump’s inauguration speech on Friday.

Key Quotes

“It has resulted in the dollar index falling back towards support at the 100.00-level. It appears mainly part of an ongoing loss of confidence in the Trump reflation trades in the near-term. President Trump’s inauguration speech failed to provide a fresh trigger for the US yields and the US dollar to head higher. Our take on the speech in general is that it showed that President Trump plans to follow through with his campaign pledges now that he is in government. Those involve a shift to more protectionist trade policies, looser regulation, higher infrastructure investment and comprehensive tax reform. The conflicting potential impact of those policies on the US dollar is contributing to higher volatility since the election.”

“One message was loud and clear that President Trump will be putting America first which risk collateral damage for the rest of the world. A shift to more protectionist trade policies appears the initial policy focus which could be one factor weighing on the US dollar in the near-term. President Trump is expected to officially notify the other members of the Trans-Pacific Partnership trade deal that the US will not participate in the agreement, and formally announce plans to start the process to renegotiate the North American Free Trade Agreement with Canada and Mexico. Mexican President Enrique Pena is scheduled to meet President Trump at the White House on the 31st January.”

“Canada’s ambassador to the US, David MacNaughton has stated that Canada is prepared to engage in talks over NAFTA both on trilateral matters with Mexico, and bilaterally as well. He stressed that Canada wants to maintain a really successful commercial relationship with the US which has been mutually beneficial, and highlighted that the President Trump’s main trade concerns are the trade deficits with China and Mexico.”

“The shift to a more protectionist trade policy stance continues to pose downside risks mainly for the Mexico peso, the Chinese renminbi and other Asian currencies, and to a lesser extent the Canadian dollar.”