US dollar on the back foot

dollarsAs Trump voiced his concerns over the apparent ‘bunch of bad hombres down’ in Mexico, the less sensational Fed voted unanimously to keep rates on hold and gave little indication of a hike at the next meeting in March. Comments included ‘some further strengthening’ in the labour market, increasing inflation, albeit still below the central bank’s target, and ‘soft’ business sentiment.

One thing you cannot say about Trump is, unlike many politicians globally, he has followed through with some of his main campaign promises, albeit some more recent actions are deemed controversial by many. We suspect the broadly dovish Fed members will act on a wait-and-see basis, as there has been little to no guidance from the Trump administration with respect to fiscal policy deployment and the consequent effects on US growth. The futures market is pricing in over a 70% chance of a hike in June.

The US ADP Employment release for December supported the Fed’s comments, beating market expectations with +246k jobs added. We look to tomorrow’s change in nonfarm payrolls report for further indication, where the market is calling for an additional 175k jobs, and unemployment unchanged at 4.7%. The stronger ISM manufacturing and ADP readings, did little to support the dollar; which has continued its descent today.

Staying with the dollar and controversial policies, the governor of the Central Bank of Iran last week stated that preparations are underway to ditch the dollar ‘as its currency of choice in its financial and foreign exchange reports’, effective March 21. At this stage the alternative is unclear, although the option of ‘selecting a basket of currencies or choosing the currency that plays the biggest part in foreign trade’ was mentioned; this suggests the euro or even the renminbi could play a major role.  Iran’s top export destination is China, at ~USD 25bn, compared with its next biggest, India at USD 10.3bn.  Whatever the government decides, March 21 is less than 7 weeks away, so revenues of ~41bn of the country’s largest and most vital export, oil, are likely to come under pressure.

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