Written by Dollar rebounds as Trump softens stance on Greenland
The US dollar rebounded against most of its major counterparts yesterday, extending its slide only against the aussie and the kiwi, while finishing the day virtually unchanged against the loonie. Today, the rally seems to be cooling down, with the declines against aussie and kiwi continuing. The only currency against which the dollar is still marching north is the yen.
Combined with a strong rebound in equity markets and a pullback in US Treasury yields, this suggests that risk appetite has returned. The change in market sentiment came after US President Trump, while speaking at the World Economic Forum in Davos, said that he will not use force to take over Greenland, adding that they will make it good and safe for Europe.
Later in the day, he posted on his Truth Social platform that he had a meeting with the Secretary General of Nato, and that they agreed on a deal framework about Greenland and the entire Arctic Region. He added that based on this, he will not be imposing the tariffs scheduled for February 1 on eight European countries.
This is another example of Trump’s strategy to use full force against his opponent and then scale the threats back to get what he wants. Perhaps he was also concerned about the risk-aversion his threats triggered.
Yen resumes Takaichi-related slide, BoJ meets
In Japan, the yen resumed its slide, with traders remaining concerned about the nation’s fiscal policy after PM Sanae Takaichi called a snap election. Although the finance minister called for calm and yields pulled back from multi-year highs, the outlook remains uncertain.
Today, the Bank of Japan commences its two-day monetary policy meeting and although no change in interest rates is expected, it will probably be a very lively meeting. Investors may be looking for clues about the timing of when the Bank is thinking to press the hike button again, and whether it stands ready to step in and purchase bonds to stabilize the free-fall in government bonds.
According to Japan’s Overnight Index Swaps (OIS) market, the next quarter-point rate hike is fully priced in for July and thus, any signals suggesting that policymakers are willing to raise rates earlier to avoid fueling inflation through higher import costs, could be a reason for the yen to stage a recovery.
The Australian dollar was also boosted by Australia’s better-than-expected employment data, which took the probability of a 25bps rate hike by the RBA at its February gathering to 40%.
Trump's remarks revive stocks, gold pulls back after new record
On Wall Street, all three indices rebounded strongly after US President Trump dropped his Greenland-related threats, gaining more than 1% each and with the Nasdaq rising the most. This suggests that investors remain willing to increase their risk exposure, despite valuations remaining elevated.
It also reveals that not only Trump influences the markets, but Wall Street is influencing Trump. If investors are not happy with any of his policies or rhetoric, they can sell more aggressively than otherwise, that way sending him a signal of dissatisfaction. With Trump’s kryptonite appearing to be an injured Wall Street, he could tone down his rhetoric again, thereby allowing a rebound. After all, this is the exact same pattern we saw happening not only yesterday, but back in April as well.
Gold closed positive for a third consecutive day on Wednesday but pulled back after hitting a fresh record high of $4,889. However, the pullback was not as prominent as the rebound in the dollar and equities, confirming that there are other factors pushing the metal higher, besides safe haven flows, like central bank buying and expectations of further easing by the Fed.
by XM.com
