Dollar Pares Decline to 4-Month Low in Reset of Reflation Trade – 27 March, 2017

The dollar remained on a defensive footing but pared its losses after falling to a fresh four-and-a-half month low, with the Trump reflation trade just a shadow of its former self.

The Bloomberg dollar index was nursing losses of about 0.4 percent on the day after dropping as much as 0.7 percent. The dollar declined against all of its G-10 peers save the Australian dollar and the Canadian dollar after relinquishing early gains. The failure of health-care reform Friday led markets to reconsider the global reflation trade that was built on expectations of U.S. fiscal stimulus.

• Emerging market FX was also on a defensive footing as oil and commodity prices fell. The Bloomberg dollar index remains up about 1.6% from its post-election low on Nov. 9 as the first quarter winds down, trimming gains of more than 7% seen since Trump was elected.
• Trading flows have slowed from the busier pace overnight and earlier in the day. Markets are trying to find fresh equilibrium levels after the dollar and stocks dropped sharply before paring losses. Dollar losses were steepest vs JPY, CHF and GBP amid haven-related demand. Losses were smallest against the commodity currencies, which were undermined by a decline in crude oil and commodities.
• Markets will use the coming sessions to gauge the ability of the Trump administration to push ahead with tax reform that was seen as a pillar of the fiscal stimulus program. Treasury Secretary Mnuchin said last week that it will be a challenge to get a plan in place by August.
• Despite the broader dollar drop, USD/JPY has retained more than half of its post-election gain as it holds above the psychologically key 110.00 level and above its 50% retracement level at 109.93; bids to buy USD are clustered around 110.00 and cushioned the dollar’s drop, said traders in Asia and Europe familiar with the transactions who asked not to be identified because they are not authorized to speak publicly. USD/JPY may find additional bids at 109.80, the traders said; that level corresponds to technical support from the Nov. 18 low.
• EUR/USD has dropped back to ~1.0870 after rising to a high of 1.0906, its highest since Nov. 11; EUR demand from short-term model-driven funds overcame strong selling above 1.0850 from real-money accounts with hedging needs, a trader in London said, adding that the selling does not represent a directional bet on the euro. Further offers are positioned above 1.0950, other traders said.
• EUR climbed earlier after Germany’s Ifo index rose more than expected and as opinion polls in France showed independent presidential candidate Emmanuel Macron gaining ground vs populist Marine Le Pen; at the same time, a weekend victory for Angela Merkel’s CDU party in a regional election allayed some concerns surrounding Germany’s Sept. 24 election

Source: Bloomberg